Union Budget 2026: Strong fiscal signals, fragmented support for India’s energy transition

Against a backdrop of global economic uncertainty, the Union Budget 2026 underscores the government’s continued emphasis on fiscal discipline. The government has committed to reducing the fiscal deficit to 4.4% of GDP in FY2026-27 and further to 4.3% in FY2027, while continuing to lower the debt-to-GDP ratio, estimated at 55.6% in the coming fiscal year. This emphasis on fiscal consolidation is critical for maintaining investor confidence and long-term macroeconomic stability.

However, when viewed through the lens of India’s energy transition, the budget presents a more mixed picture. While there are notable positives, particularly for decentralised renewable energy and select clean energy supply chains, the overall support remains uneven and, in some critical areas, misaligned with India’s near-term climate, air quality and energy security priorities.

On the positive side, the government has increased allocations for PM Surya Ghar Muft Bijli Yojana by a substantial INR5,000 crore. This scheme, focused on rooftop solar, is a meaningful step towards accelerating decentralised renewable energy, reducing household electricity costs and easing pressure on distribution companies (discoms). Bioenergy has also received a modest but welcome boost, with allocations rising from INR175 crore to INR275 crore.

The budget also demonstrates intent to strengthen the tail end of clean energy supply chains—an area of growing strategic importance. Proposed rare earth corridors in Andhra Pradesh, Kerala, Odisha, and Tamil Nadu, alongside customs duty exemptions for capital goods used in critical mineral processing, lithium-ion battery manufacturing and solar glass production, signal an effort to reduce import dependence and build domestic manufacturing capabilities in key clean energy inputs.

However, additional support in key areas would be important to sustain momentum. Wind energy allocations remain stagnant, and spending on transmission and energy storage, arguably the backbone of renewable energy integration, has declined from INR800 crore last year to INR600 crore this year. This reduction comes at a time when India is rapidly scaling renewable capacity. Adequate investment in grid augmentation and storage will be critical to ensure that higher renewable penetration can be integrated reliably and efficiently.

Similarly, initial government support under the Production-Linked Incentive (PLI) framework has helped establish large-scale domestic capacity in solar modules, cells and wafers. While some of these segments, particularly module manufacturing, may now be increasingly left to market forces, this shift has not been matched by stronger support for electric vehicles (EVs) and advanced battery configurations, where costs remain high and technologies are still evolving. While two- and three-wheelers have achieved market maturity, passenger four-wheelers, buses and trucks continue to require targeted fiscal and policy support to enable scale-up, innovation and cost reductions.

The relevance of this issue is heightened by worsening urban air pollution. January saw a sharp rise in the number of polluted days across several Indian cities, including the Delhi National Capital Region, highlighting the public health and economic implications of transport emissions. In this context, Budget 2026 provides limited additional impetus for electric vehicle manufacturing in harder-to-abate segments or for scaling up charging infrastructure.

At the same time, the budget allocates significant resources to relatively expensive or unproven technologies. The INR3,500 crore allocation for coal and lignite gasification, alongside a proposed INR20,000 crore outlay over five years for carbon capture, utilisation and storage (CCUS), would benefit from careful assessment against cost-effectiveness and deployment timelines. While innovation across technologies is important, these solutions remain capital-intensive and technologically uncertain, particularly when compared to the falling costs and proven scalability of renewables, storage and electrification.

The government’s renewed push on nuclear energy is notable. The proposal to develop at least 100GW of nuclear capacity by 2047, amend key legislation to enable private participation, extend customs duty exemptions until 2035, and launch a INR20,000 crore mission for small modular reactors reflects long-term ambition. Nuclear energy can contribute to decarbonisation, but it remains expensive, slow to deploy and fraught with safety and liability concerns—factors that continue to influence investor appetite.

On power sector reforms, the budget rightly recognises that renewable energy uptake hinges on the financial health of discoms. Allowing states an additional 0.5% of gross state domestic product (GSDP) borrowing, contingent on distribution reforms and intra-state transmission upgrades, is a step in the right direction. However, these reforms must be matched with sustained investment in transmission and storage, without which the benefits will remain constrained.

Financing remains the largest gap in India’s energy transition. Increased allocations to institutions such as Indian Renewable Energy Development Agency (IREDA) and Solar Energy Corporation of India (SECI) from around INR36,000 crore to INR43,000 crore, along with plans to restructure Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC), are welcome. The proposed Infrastructure Risk Guarantee Fund could also help de-risk lending. However, broader use of credit guarantees and risk-sharing instruments could further mobilise private capital, particularly for EV manufacturing and MSMEs across clean energy value chains.

Budget 2026 reflects strong macro-fiscal ambition. Additional emphasis on grid infrastructure, energy storage, transport electrification and risk-mitigation mechanisms could further accelerate India’s energy transition while strengthening climate, air quality and energy security outcomes.