Why in news?

Union Finance Minister Nirmala Sitharaman presented the Union Budget 2026–27 in Parliament, describing it as a Yuva Shakti–driven Budget rooted in the government’s Sankalp to prioritise the poor, underprivileged and disadvantaged.

What’s in Today’s Article?

• Direct Taxes: Key Proposals in Union Budget 2026–27
• Indirect Taxes: Key Proposals in Union Budget 2026–27

Direct Taxes: Key Proposals in Union Budget 2026–27

• New Income Tax Framework
  • The New Income Tax Act, 2025 will come into force from April 2026.
  • Simplified Income Tax Rules and Forms to be notified shortly.
  • Redesigned tax forms to enable easy compliance for ordinary taxpayers.
• Relief and Ease for Taxpayers
  • TCS Rationalisation- Overseas tour programme packages: TCS reduced to 2% (from 5%–20%), with no amount threshold.
    • Liberalized Remittance Scheme (LRS) for education and medical purposes: TCS reduced from 5% to 2%.
  • TDS Simplification
    • Manpower supply services brought under TDS provisions applicable to contractors.
    • TDS rate fixed at 1% or 2%, benefiting labour-intensive sectors.
    • Automated, rule-based process introduced for small taxpayers to obtain lower or nil TDS certificates.
  • Return Filing Reforms
    • Time limit for revising returns extended from 31 December to 31 March, with nominal fee.
    • Staggered timelines for filing income tax returns to ease compliance.
  • Foreign Asset Disclosure
    • One-time, 6-month disclosure scheme for small taxpayers such as students, young professionals, tech employees, and relocated NRIs to declare overseas income or assets below a specified threshold.
• Rationalising Penalty and Prosecution
  • Reducing Litigation- Assessment and penalty proceedings to be integrated through a single common order. Pre-payment requirement reduced from 20% to 10%, calculated only on core tax demand.
    • Taxpayers allowed to update returns even after reassessment begins, with an additional 10% tax.
  • Expanded Immunity Provisions
    • Immunity from penalty and prosecution extended from under-reporting to misreporting, subject to payment of 100% additional tax.
    • Decriminalisation of:
      • Non-production of books of accounts
      • Non-deduction of TDS where payment is made in kind
    • Immunity from prosecution for non-disclosure of non-immovable foreign assets below ₹20 lakh, with retrospective effect from 1 October 2024.
• Tax Support for Cooperatives
  • Deduction extended to cooperatives supplying cattle feed and cotton seed, in addition to milk, oilseeds, fruits and vegetables.
  • Inter-cooperative dividend income allowed as deduction under the new tax regime, if passed on to members.
  • Three-year tax exemption on dividend income for notified national cooperative federations on investments made up to 31 January 2026, subject to redistribution.
• Strengthening the IT Sector
  • Simplified Tax Regime for IT Services
    • Software development, ITES, KPO and contract R&D services clubbed into a single category: Information Technology Services.
    • Common safe harbour margin fixed at 15.5%.
    • Safe harbour threshold increased from ₹300 crore to ₹2,000 crore.
    • Safe harbour approvals to be automated and valid for five continuous years.
  • Faster APA Mechanism
    • Unilateral Advanced Pricing Agreements (APA) for IT services to be concluded within two years (extendable by six months).
    • Facility of modified returns extended to associated entities under APA.
• Attracting Global Business and Investment
• Tax holiday till 2047 for foreign companies providing global cloud services using Indian data centres.
• 15% cost-based safe harbour for related-party data centre services.
• Safe harbour for bonded warehouse component warehousing at 2% profit margin, resulting in low effective tax.
• Five-year income tax exemption for non-residents supplying capital goods to toll manufacturers in bonded zones.
• Exemption on global income of non-resident experts for five years under notified schemes.
• MAT exemption for non-residents taxed on presumptive basis.
• Tax Administration Reforms
  • Constitution of a Joint MCA–CBDT Committee to integrate ICDS into IndAS, eliminating dual accounting from FY 2027–28.
  • Rationalisation of the definition of ‘accountant’ for Safe Harbour Rules.
• Other Key Tax Proposals
  • Buyback Taxation
    • Buybacks for all shareholders to be taxed as capital gains.
    • Additional buyback tax on promoters:
    • 22% for corporate promoters
    • 30% for non-corporate promoters
  • Transaction and Market Taxes
    • TCS on alcoholic liquor, scrap and minerals reduced to 2%.
    • TCS on tendu leaves reduced from 5% to 2%.
    • STT on futures increased to 0.05%.
    • STT on options premium and exercise increased to 0.15%.
  • MAT Reforms
    • MAT to become final tax from 1 April 2026.
    • MAT rate reduced from 15% to 14%.
    • No fresh MAT credit accumulation post April 2026.
    • Existing MAT credit usable only under new tax regime, limited to 25% of tax liability.

Indirect Taxes: Key Proposals in Union Budget 2026–27

The proposals on Customs and Central Excise aim to simplify the tariff structure, support domestic manufacturing, enhance export competitiveness, correct duty inversion, and improve ease of living and doing business.

• Rationalisation of Customs Duties
  • Support for Exports and Manufacturing
    • Marine, Leather and Textile sectors:
      • Duty-free import limit for specified inputs used in seafood exports increased from 1% to 3% of FOB value.
      • Duty-free inputs for leather and synthetic footwear exports allowed.

• Energy and Clean Technology
  • Extension of basic customs duty (BCD) exemption on capital goods used for manufacturing Lithium-ion cells.
  • BCD exemption on sodium antimonate used in manufacturing solar glass.
  • Entire value of biogas excluded while calculating excise duty on biogas-blended CNG.
• Nuclear, Critical Minerals and Consumer Electronics
  • Extension of BCD exemption on imports for nuclear power projects till 2035.
    • BCD exemption on capital goods required for processing critical minerals.
    • BCD exemption on specified parts used in the manufacture of microwave ovens.
• Civil and Defence Aviation
  • BCD exemption on components and parts for manufacturing civilian, training and other aircraft.
    • BCD exemption on raw materials imported for manufacture of aircraft parts used in defence MRO operations.
    • Special Economic Zones
    • One-time special measure to allow eligible SEZ manufacturing units to sell goods to the Domestic Tariff Area (DTA) at concessional duty rates.
• Ease of Living Measures
  • Tariff rate on dutiable personal imports reduced from 20% to 10%.
  • BCD exemption on 17 drugs and medicines.
  • Seven additional rare diseases added for duty-free personal imports of medicines and Food for Special Medical Purposes (FSMP).
• Customs Process Reforms
  • Trade Facilitation
    • Customs processes to adopt minimal intervention for faster cargo movement.
    • Duty deferral period for Tier-2 and Tier-3 Authorised Economic Operators (AEOs) increased from 15 to 30 days and extended to eligible manufacturer-importers.
    • Validity of advance rulings binding on Customs extended from 3 to 5 years.
    • Government agencies encouraged to use AEO accreditation for preferential cargo clearance.
  • Warehousing Reforms
    • Customs warehousing framework to shift to a warehouse-operator-centric model, with:
      • Self-declarations
      • Electronic tracking
      • Risk-based audits
• Ease of Doing Business Initiatives
  • Single interconnected digital window for cargo clearances from all government agencies by end-FY.
  • Immediate customs clearance for goods with no compliance requirements after online registration.
  • Roll-out of Customs Integrated System (CIS) within two years as a unified, scalable platform.
  • Phased expansion of non-intrusive scanning using AI and advanced imaging, with the goal of scanning all containers at major ports.
• Trade, Logistics and E-commerce Boost
  • Fish caught by Indian vessels in the EEZ or High Seas made duty-free.
  • Landing of such fish at foreign ports treated as export of goods.
  • Removal of ₹10 lakh value cap per consignment on courier exports, supporting MSMEs, artisans and start-ups using e-commerce.
• Baggage and Dispute Resolution Reforms
  • Baggage clearance rules to be revised to enhance duty-free allowances in line with modern travel patterns.
  • Dispute settlement mechanism allowing honest taxpayers to close cases by paying an additional amount in lieu of penalty.

Why in news?

Union Minister for Finance presented the Union Budget 2026–27 in Parliament, the first to be prepared in Kartavya Bhawan.

The Budget is anchored around three “kartavyas” (duties). The first focuses on accelerating and sustaining economic growth by boosting productivity, competitiveness, and resilience amid global uncertainties.

The second aims to fulfil people’s aspirations by strengthening their capacities and making them active partners in India’s prosperity.

The third, aligned with the vision of Sabka Saath, Sabka Vikas, seeks to ensure inclusive access to resources, amenities, and opportunities so that every family, region, and sector can meaningfully participate in growth.

What’s in Today’s Article?

• Union Budget 2026–27: Key Fiscal Estimates
• First Kartavya — Accelerating and Sustaining Economic Growth
• Second Kartavya: Fulfilling Aspirations and Building Human Capacity
• Third Kartavya: Sabka Saath, Sabka Vikas through Targeted Inclusion

Union Budget 2026–27: Key Fiscal Estimates

• Receipts and Expenditure
  • Non-debt receipts are estimated at ₹36.5 lakh crore.
  • Total expenditure is projected at ₹53.5 lakh crore.
  • Centre’s net tax receipts are estimated at ₹28.7 lakh crore.
• Borrowings
  • Gross market borrowings are pegged at ₹17.2 lakh crore.
  • Net market borrowings from dated securities are estimated at ₹11.7 lakh crore.
• Revised Estimates for 2025–26
  • Non-debt receipts stand at ₹34 lakh crore, with net tax receipts of ₹26.7 lakh crore.
  • Total expenditure is revised to ₹49.6 lakh crore, including capital expenditure of about ₹11 lakh crore.
• Fiscal Deficit
  • Fiscal deficit (BE 2026–27) is estimated at 4.3% of GDP.
  • Fiscal deficit (RE 2025–26) remains at 4.4% of GDP, unchanged from the Budget Estimate.
• Debt Position
  • Debt-to-GDP ratio is projected to decline to 55.6% in BE 2026–27, from 56.1% in RE 2025–26, indicating gradual fiscal consolidation.

First Kartavya — Accelerating and Sustaining Economic Growth

• The first Kartavya focuses on boosting productivity, competitiveness, and resilience through six major interventions.

1.Scaling Up Manufacturing in Strategic and Frontier Sectors

• Biopharma and Healthcare Manufacturing
  • Biopharma SHAKTI launched with an outlay of ₹10,000 crore over five years to position India as a global biopharma hub.
  • Creation of a biopharma network with 3 new National Institutes of Pharmaceutical Education and Research (NIPER) and upgradation of 7 existing institutes.
  • Establishment of 1,000+ accredited clinical trial sites across India.
• Semiconductors and Electronics
  • India Semiconductor Mission (ISM) 2.0 to promote equipment and material manufacturing, full-stack Indian IP, and industry-led R&D and training.
  • Electronics Components Manufacturing Scheme outlay increased to ₹40,000 crore.
• Critical Minerals and Chemicals
  • Dedicated Rare Earth Corridors to be set up in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu for mining, processing, R&D, and manufacturing.
  • Scheme to support States in establishing 3 Chemical Parks through a cluster-based, plug-and-play challenge route.
• Strengthening Capital Goods Capability
  • Hi-Tech Tool Rooms to be set up by CPSEs at two locations as digitally enabled automated service bureaus.
  • Construction and Infrastructure Equipment (CIE) Scheme to strengthen domestic manufacturing of high-value, advanced equipment.
  • Container Manufacturing Scheme with over ₹10,000 crore outlay over five years to build a globally competitive ecosystem.
• Integrated Programme for the Textile Sector
  • National Fibre Scheme for self-reliance in natural fibres (silk, wool, jute), man-made fibres, and new-age fibres.
  • Textile Expansion and Employment Scheme to modernise traditional clusters with capital support, technology upgradation, and common testing facilities.
  • Mega Textile Parks in challenge mode focusing on technical textiles.
  • Mahatma Gandhi Gram Swaraj Initiative to strengthen khadi, handloom, and handicrafts through skilling, quality improvement, branding, and global market linkage.

2.Rejuvenating Legacy Industrial Sectors

• Scheme announced to revive 200 legacy industrial clusters by improving cost competitiveness and efficiency through infrastructure and technology upgrades.

3.Creating “Champion SMEs” and Supporting Micro Enterprises

• ₹10,000 crore SME Growth Fund to nurture future “Champion SMEs” based on defined performance criteria.
• Additional ₹2,000 crore allocation to the Self-Reliant India Fund to support micro enterprises and ensure access to risk capital.
• Professional bodies such as ICAI, ICSI, and ICMAI to develop short-term courses and tools to create ‘Corporate Mitras’, especially in Tier-II and Tier-III towns.

4.Delivering a Powerful Push to Infrastructure

• Public Capex and Risk Mitigation
  • Public capital expenditure increased to ₹12.2 lakh crore in FY 2026–27.
  • Infrastructure Risk Guarantee Fund to boost private developer confidence during construction phases.
  • Monetisation of CPSE real estate through dedicated REITs.
• Logistics, Waterways and Coastal Shipping
  • New Dedicated Freight Corridor from Dankuni to Surat.
  • 20 new National Waterways to be operationalised over five years, starting with NW-5 in Odisha.
  • Ship repair hubs for inland waterways at Varanasi and Patna.
  • Coastal Cargo Promotion Scheme to raise modal share of waterways and coastal shipping from 6% to 12% by 2047.
• Aviation and Connectivity
  • Incentives for indigenous seaplane manufacturing and last-mile connectivity.
  • Seaplane VGF Scheme to support operations and tourism.

5.Ensuring Long-Term Energy Security

• ₹20,000 crore outlay over five years for Carbon Capture, Utilisation and Storage (CCUS)

6.Developing City Economic Regions (CERs)

• ₹5,000 crore per CER over five years through a reform-linked, results-based challenge mechanism.
• Development of seven high-speed rail corridors as growth connectors:
  • Mumbai–Pune
  • Pune–Hyderabad
  • Hyderabad–Bengaluru
  • Hyderabad–Chennai
  • Chennai–Bengaluru
  • Delhi–Varanasi
  • Varanasi–Siliguri

Financial Sector and Urban Finance Reforms

• High-Level Committee on Banking for Viksit Bharat to align banking with future growth needs.
• Restructuring of PFC and REC to improve scale and efficiency of public sector NBFCs.
• Review of FEMA (Non-Debt Instruments) Rules to modernise foreign investment regulations.
• ₹100 crore incentive for municipal bond issuances above ₹1,000 crore to deepen urban bond markets.

Second Kartavya: Fulfilling Aspirations and Building Human Capacity

• The Second Kartavya focuses on strengthening human capital, skills, and services-led growth, positioning people as central partners in India’s development journey.
• Education–Employment–Enterprise Linkage
  • A High-Powered ‘Education to Employment and Enterprise’ Standing Committee to be set up.
  • The committee will recommend measures to strengthen the services sector as a core driver of Viksit Bharat.
• Creating Professionals for Viksit Bharat
  • Upgradation of existing Allied Health Professional (AHP) institutions and establishment of new AHP institutions in both government and private sectors.
  • Addition of 1 lakh Allied Health Professionals over the next five years.
  • Establishment of five Regional Medical Hubs to promote India as a global medical tourism hub.
• Strengthening AYUSH Systems
  • Establishment of three new All India Institutes of Ayurveda to strengthen education, research, and healthcare delivery in traditional medicine systems.
• Animal Husbandry and Veterinary Services
  • Scaling up availability of over 20,000 veterinary professionals.
  • Launch of a loan-linked capital subsidy scheme to support:
    • Veterinary and para-veterinary colleges
    • Veterinary hospitals
    • Diagnostic laboratories
    • Breeding facilities in the private sector
• Promoting the Orange Economy (Creative Industries)
  • Support to the Indian Institute of Creative Technologies, Mumbai to set up AVGC (Animation, Visual Effects, Gaming and Comics) Content Creator Labs in:
    • 15,000 secondary schools
    • 500 colleges
• Education Infrastructure and Inclusion
• Creation of five University Townships near major industrial and logistics corridors through a challenge-based approach.
• Establishment of one girls’ hostel in every district through VGF or capital support to improve access to education.
• Tourism and Hospitality Development
  • Skill Development in Tourism
    • National Council for Hotel Management and Catering Technology to be upgraded to the National Institute of Hospitality.
    • Pilot scheme to upskill 10,000 tourist guides at 20 sites through a 12-week standardized training programme in hybrid mode, in collaboration with an IIM.
  • Digital Tourism Infrastructure
    • Creation of a National Destination Digital Knowledge Grid to digitally document all cultural, spiritual, and heritage sites.
  • Heritage and Cultural Tourism
    • Development of 15 major archaeological and heritage sites—including Lothal, Dholavira, Rakhigarhi, Adichanallur, Sarnath, Hastinapur, and Leh Palace—into experiential cultural destinations.
• Sports Development
  • Launch of the Khelo India Mission to transform India’s sports ecosystem over the next decade.

Third Kartavya: Sabka Saath, Sabka Vikas through Targeted Inclusion

• The Third Kartavya focuses on inclusive growth, ensuring that farmers, vulnerable groups, and lagging regions actively participate in India’s development process.
• Increasing Farmer Incomes
  • Water Resources and Rural Assets - Integrated development of 500 reservoirs and Amrit Sarovars to strengthen irrigation, water security, and rural livelihoods.
  • High-Value Agriculture Push - Government support for high-value crops such as coconut, sandalwood, cocoa, and cashew, particularly in coastal regions.
    • Launch of a Coconut Promotion Scheme to increase production and productivity.
  • Digital Agriculture: Bharat-VISTAAR - Launch of Bharat-VISTAAR (Virtually Integrated System to Access Agricultural Resources).
    • A multilingual AI-based platform integrating AgriStack portals with ICAR’s agricultural practice packages to improve farm decision-making.
• Empowering Divyangjan
• Launch of Divyangjan Kaushal Yojana to enable persons with disabilities to access task-oriented and process-driven roles.
• Focus sectors include IT, AVGC, Hospitality, and Food & Beverages.
• Strengthening Mental Health and Trauma Care
  • Establishment of NIMHANS-2 in North India.
  • Upgradation of National Mental Health Institutes at Ranchi and Tezpur as Regional Apex Institutions.
• Focus on Purvodaya States and the North-Eastern Region
  • Regional Infrastructure and Mobility - Development of an integrated East Coast Industrial Corridor with a key node at Durgapur.
    • Creation of five tourism destinations across the five Purvodaya States.
    • Deployment of 4,000 e-buses to improve sustainable public transport.
  • Buddhist Circuit Development - Launch of a scheme to develop Buddhist Circuits across Arunachal Pradesh, Sikkim, Assam, Manipur, Mizoram, and Tripura.
• Fiscal Support to States: 16th Finance Commission
  • Allocation of ₹1.4 lakh crore to States in FY 2026-27 as Finance Commission grants, in line with the recommendations of the 16th Finance Commission.

Why in the News?

• The Union Budget 2026 has reduced central allocations for urban development by 11.6%, triggering debate on the government’s commitment to India’s cities.

What’s in Today’s Article?

• Urban Development (Context, Importance, Financing Framework, etc.)
• Union Budget 2026 (Urban Allocation, Spending Priorities, Cuts in Flagship Schemes, Implications, etc.)

Urban Development in India: Context and Importance

• Urban India is central to the country’s economic and social transformation.
• Cities contribute nearly two-thirds of India’s GDP and act as hubs for employment, innovation, and service delivery.
• Rapid urbanisation, however, has placed enormous stress on housing, transport, sanitation, water supply, and urban governance systems.
• Managing this transition requires sustained public investment, especially as urban local bodies (ULBs) remain fiscally weak and highly dependent on central and state transfers.
• The Constitution, through the 74th Constitutional Amendment Act, envisaged empowered municipalities with functional autonomy.
• In practice, inadequate devolution of funds, functions, and functionaries has limited their capacity.
• Central schemes such as PMAY-Urban, AMRUT, Swachh Bharat Mission-Urban, and investments in mass transit were designed to fill this gap and create a baseline of urban services across Indian cities.

Urban Development Financing Framework

• Urban development in India is financed through a mix of central allocations, state budgets, municipal revenues, and borrowing.
• Centrally Sponsored Schemes (CSS) play a dominant role, particularly in housing, sanitation, water supply, and mobility.
• While capital-intensive projects such as metro rail have received consistent support, everyday urban services, waste management, buses, footpaths, drainage, and informal housing depend on sustained, predictable funding.
• In recent years, climate risks such as heatwaves, floods, and water scarcity have further increased the need for resilient urban infrastructure.
• This makes budgetary prioritisation of cities not merely a welfare concern but a macroeconomic necessity.

Union Budget 2026: Overall Urban Allocation

• The Union Budget 2026 has reduced total central outlay for urban development from Rs. 96,777 crore to Rs. 85,522 crore, a nominal cut of 11.6%.
• After accounting for inflation, the real decline in urban spending is even sharper.
• This contraction comes at a time when cities are absorbing large-scale migration, facing infrastructure fatigue, and confronting climate-induced stresses.
• The reduction signals a shift in fiscal priorities, where urban development appears to be treated as a residual sector rather than a growth-critical investment area.

Skewed Spending Priorities within Urban Allocation

• Despite the overall contraction, spending remains heavily skewed towards metro rail projects.
• In 2026-27, metro and mass rapid transit systems account for Rs. 28,740 crore, about one-third of total urban allocations.
• While metro systems are important for large cities, they are capital-intensive, spatially limited, and cater mainly to formal commuters.
• By contrast, bus-based public transport, non-motorised transport, and last-mile connectivity, used by the majority of urban residents, receive relatively limited attention.
• This reflects a policy bias towards high-visibility infrastructure over inclusive and scalable mobility solutions.

Cuts in Flagship Urban Schemes

• All major urban welfare and service schemes have seen budgetary reductions:

• Pradhan Mantri Awas Yojana-Urban (PMAY-U) has faced a cut of nearly 6%, despite persistent urban housing shortages and expanding informal settlements.
• Swachh Bharat Mission-Urban (SBM-U) allocation has been halved, raising concerns about the sustainability of sanitation gains and waste processing infrastructure.
• AMRUT, critical for urban water supply and sewerage, has seen a 20% reduction, even as cities face acute water stress and ageing infrastructure.

• These cuts directly affect the quality of life in cities and risk reversing progress made in basic urban services.

Implications for Urban Governance and Growth

• The Budget does not compensate for reduced central spending through greater fiscal devolution or enhanced revenue-raising powers for municipalities.
• As a result, ULBs remain constrained in planning long-term infrastructure and responding to local needs.
• At a broader level, weakening urban investment undermines India’s growth aspirations. Globally, successful development trajectories are built on well-funded, inclusive, and productive cities.
• Treating urban development as a cost centre rather than an engine of growth risks long-term economic and social consequences.

Context:

• There is the need to analyse the Union Budget 2026-27 against the backdrop of intensifying geopolitical uncertainty, trade fragmentation, and macroeconomic constraints.
• The core argument is that the Budget marks a decisive shift towards trade, capital formation, technology, and export competitiveness as engines of growth, while attempting to preserve macroeconomic stability in a volatile world.

Changing Global Order - From Integration to Fragmentation:

• The global economy is witnessing a rupture in the old order, marked by -
  • Tariffs, export controls, and licensing regimes by the US and China
  • Restrictions on advanced technologies
  • Fragmentation of global value chains
• This has reignited debates on -
  • Inflation vs growth trade-offs
  • Capital flows and currency management
  • India’s attractiveness as an investment destination
• The Budget and Economic Survey 2025-26 subtly recognizes this chaotic shift, supporting "Carney-ism"—the notion that nations that can forge agile alliances in the areas of commerce, energy, and security will gain influence.

Trade as an Engine of Growth:

• Budget speech: The Finance Minister’s mantra this year has been capital, technology, and export competitiveness.
• Reflected in:
  • Trade agreements with the EU, UK, Australia, UAE and Oman
  • Rationalisation of customs duties and correction of inverted duty structures
• The approach balances Atmanirbharta (self-reliance) with deeper integration with trusted partners, particularly in Asia and Europe.

Macroeconomic Constraints - CAD, Debt and Savings:

• The Economic Survey warns that a persistent Current Account Deficit (CAD) raises macro risk premium, and interest rates.
• However, CAD of 1.3% of GDP (Q2 FY26) need not be eliminated by running down forex reserves, as India has managed higher CADs in the past with adequate buffers.
• The FRBM Review Committee placed sustainable CAD at around 2.3% of GDP.

Blueprint for India’s “Goldilocks” Economy:

• Fiscal credibility beyond headline deficits:
  • Fiscal consolidation since FY21:
    • Deficit reduced from 9.2% (FY21) to 4.8% (FY25) and 4.4% (FY26).
    • Public capex has risen to Rs 11.21 lakh crore, while the general government debt-to-GDP ratio has declined by over seven percentage points.
  • Role of GST: GST provides a new source of information as well as revenue, and encourages movement from informal to formal.
  • Challenges:
    • Government borrowing absorbs a large share of net household financial savings.
    • Shift of household savings to equity markets may raise borrowing costs.
    • High cost of capital hurts manufacturing and MSMEs.
  • Imperative: Fiscal discipline must crowd in private investment, not pre-empt it.
• State finances and cooperative fiscal federalism:
  • State deficits have risen since FY22, reaching around 3.2% of GDP in FY25, while state debt remains close to 28% of GDP.
  • In integrated sovereign debt markets, sub-national slippages raise borrowing costs for all. Therefore, cooperative fiscal federalism must move beyond transfers toward shared discipline and credible rules.
• Private investment as the growth bridge:
  • The Centre is leading by example with additional grants of Rs 1.6 lakh crore to raise states’ capex.
  • However, capex alone cannot remain the primary growth engine, private investment must lead, as it remains the bridge between macroeconomic stability and sustained growth.
  • The investment rate has stabilised near 30% of GDP, corporate balance sheets have strengthened, and capacity utilisation has improved.
  • The Budget emphasises simplified regulations, faster contract enforcement, and lowering the economy-wide cost of capital.
• Competitiveness, manufacturing and climate:
  • Industrial GVA grew by 7% in the first half of FY26, with medium and high-technology manufacturing accounting for nearly half of this.
  • The Budget strengthens competitiveness through rationalised customs duties, correction of inverted duty structures, faster MSME payments, and stronger private R&D.
  • The Budget’s focus on carbon capture utilisation and storage (CCUS), will be good for India while enabling exports to Europe (e.g., CBAM) and elsewhere.
  • This means climate action is now an instrument of industrial and trade policy.

Human Capital, AI and Urban Transformation:

• Labour and productivity:
  • India’s workforce exceeds 56 crore, unemployment has declined to 4.8%, and female labour force participation has crossed 41%.
  • AI is expected to lift productivity, with the Economic Survey projecting total factor productivity growth of 1.9% annually.
• Urban transformation:
  • Cities as growth engines: Cities generate a disproportionate share of output and FDI. Budget focus on City Economic Regions (CERs). For example, ₹5,000 crore per CER over five years, and funding will be linked to outcomes.
  • Urban finance: Between 2017 and 2025, municipal bonds — further incentivised in this Budget — raised Rs 2,834 crore. Property taxes now account for about 60% of urban local body revenues.
  • Without stronger municipal finance and governance, India risks losing agglomeration benefits in labour absorption and capital attraction. Pollution and congestion are a major constraint on talent, investment, and growth.
  • Therefore, urban infrastructure needs reforms that reduce emissions, manage mobility and improve service delivery.

Challenges and Way Forward:

• Fragmented global order and trade uncertainty: Build agile alliances across trade, energy and security.
• High cost of capital: For MSMEs and manufacturing. Crowd in private investment through lower cost of capital.
• Rising state-level fiscal risks: Maintain credible fiscal consolidation with quality expenditure. Strengthen cooperative fiscal federalism.
• Climate risks to industrial competitiveness: Integrate climate policy with industrial strategy.
• Weak urban governance and infrastructure stress: Invest in human capital, AI adoption and urban reforms. Stronger, cleaner public transport spurs inclusion and creates opportunities for poor people to benefit from urban growth.

Conclusion:

• In a harsher and more fragmented global environment, the Union Budget seeks not just to accelerate growth, but to govern growth with judgement and resilience.
• It reflects a Schumpeterian moment of creative destruction, creating space for new investments, technologies and alliances.
• By aligning fiscal prudence, trade openness, climate competitiveness and urban transformation, the Budget positions India to protect growth while reshaping its development trajectory for a turbulent world.

Context

• The Union Budget 2026–27 is presented during a rare phase of strong economy performance marked by high growth and relatively low inflation.
• India’s rise to become the fourth-largest global economy reinforces optimism, yet underlying vulnerabilities remain.
• Geopolitical tensions, tariff wars, and supply-chain disruptions pose risks to long-term expansion.
• Against this backdrop, the Budget seeks to balance optimism with realism by maintaining continuity, articulating a long-term vision, and offering selective short-term interventions aimed at sustaining growth and improving welfare.

Growth with Fiscal Prudence

• A defining feature of the Budget is its adherence to fiscal discipline while continuing to rely on public investment as the main growth driver.
• The increase in capex to ₹12.2 lakh crore for FY27 signals continuity in infrastructure-led expansion.
• Simultaneously, the commitment to consolidation is reflected in the fiscal deficit target of 4.3% of GDP, aligning with the medium-term goal of lowering public debt.
• The borrowing programme involves significant borrowing, with higher gross market issuances even as net borrowings remain stable.
• Assumptions of nominal GDP growth above 10% appear realistic given projected real growth and moderate inflation.
• However, the scale of government borrowing may restrict further monetary easing, limiting room for interest rate cuts.
• This interaction between fiscal and monetary policy underscores the delicate balance required to sustain momentum without destabilising macroeconomic conditions.

Strategic Push for Manufacturing and Frontier Sectors

• A notable shift in the Budget is its early and explicit focus on manufacturing.
• The strategy targets emerging industries, legacy sectors, and MSMEs, signalling an intent to broaden the production base beyond services.
• Support for seven strategic sectors, including semiconductors, electronics, biopharma, chemicals, capital goods, and textiles, reflects a move beyond earlier incentive-based frameworks toward deeper industrial capability building.
• Enhanced allocations for electronics and the launch of India Semiconductor Mission 2.0 aim to reduce dependence on fragile global supply chains.
• Investments in logistics, freight corridors, and container manufacturing strengthen export competitiveness, particularly in a volatile global trade environment.
• Measures supporting exports affected by higher tariffs, alongside the creation of an SME Growth Fund, address structural financing gaps and encourage scalable enterprise growth.

Contradictions and Policy Surprises

• Despite its coherence in several areas, the Budget presents notable inconsistencies.
• Expectations of substantial revenue from disinvestment appear optimistic given repeated shortfalls in previous years.
• A major surprise is the long-term tax exemption for global cloud service providers operating through Indian data centres, raising questions about opportunity costs and revenue foregone.
• The anticipation of job creation in the services sector contrasts with trends of automation and artificial intelligence reducing labour absorption, weakening assumptions around employment
• The strong push for data centres increases demand for data infrastructure but is not matched by a corresponding emphasis on power generation, despite the sector’s high energy intensity.
• Additionally, the continued silence on exchange rate volatility leaves the issue of the rupee unaddressed, despite its macroeconomic significance.

Structural Gaps and Demand Constraints

• While the emphasis on manufacturing is welcome, the absence of a comprehensive industrial policy framework risks leaving initiatives fragmented.
• Industrial expansion requires sustained domestic demand, yet demand-side measures receive limited attention.
• Shortfalls in effective capital expenditure relative to budgeted targets weaken multiplier effects and undermine assumptions of demand-led expansion.
• Given uncertainty in global markets, domestic income and job growth are critical to sustaining manufacturing momentum.
• Weak execution of planned investments and rising prices threaten real purchasing power, potentially constraining consumption.
• Addressing these gaps is essential to building long-term resilience and ensuring that growth translates into broad-based gains.

Conclusion

• The Union Budget 2026–27 reflects an attempt to balance ambition with caution.
• It reinforces infrastructure-led investment, prioritises strategic manufacturing, and maintains macroeconomic stability.
• However, optimistic revenue assumptions, internal contradictions, and limited attention to domestic demand and implementation challenges constrain its transformative potential.
• Sustained growth will depend on aligning vision with delivery and strengthening the structural foundations of the economy.

Context

• The annual Union Budget is both a fiscal statement and a strategic document responding to short- and medium-term economic challenges.
• Beyond headline announcements, it signals the broader direction of economic policy, particularly in a context where long-term frameworks and explicit targets are absent.
• Budget 2026–27 assumes heightened significance as it is shaped by intensifying geopolitical uncertainty and persistent weaknesses in domestic manufacturing.

Geopolitical Context and Policy Imperatives

• The global environment surrounding Budget 2026-27 is marked by instability and the erosion of established international economic norms.
• Renewed tensions during the second term of Donald Trump’s presidency disrupted global trade arrangements and complicated India’s external economic relations.
• India’s strategic ties with Russia face pressure, while steep U.S. tariffs on labour-intensive Indian exports have undermined prospects for closer bilateral trade.
• At the same time, India’s dependence on imports from China remains substantial despite policy efforts since 2020 to curb it.
• Restrictions imposed by China on critical minerals, industrial machinery, and skilled services, particularly for electric vehicles, have exposed strategic vulnerabilities.
• Within this context, the Budget underscores the urgency of strengthening domestic industrial capabilities.
• The emphasis on reducing import dependence, streamlining trade procedures, and promoting domestic production reflects a growing alignment between economic and strategic priorities, framed around the goal of self-reliance.

Manufacturing Decline and Structural Weaknesses

• India’s recent growth trajectory masks deep structural concerns. Despite robust headline GDP growth, the economy has experienced premature deindustrialisation.
• Manufacturing’s share in output has stagnated or declined, while manufacturing employment has fallen relative to total employment.
• Concerns also persist about the reliability of official manufacturing growth estimates.
• Alternative data from the ASI suggest significantly slower output growth, pointing to underlying fragilities.
• Weak investment, especially in fixed capital, has contributed to the erosion of industrial capacity.
• Rising dependence on imported capital and intermediate goods further constrains domestic production.
• An inverted duty structure, where intermediate goods face higher duties than finished products, has discouraged domestic value addition.
• Flagship initiatives such as Make in India, Aatma Nirbhar Bharat, and the Production Linked Incentive schemes have yielded limited success in reversing these trends, apart from select assembly-driven gains.

Budgetary Measures and Their Limits

• Targeted Tariff Rationalisation
  • Budget 2026–27 attempts to address these vulnerabilities through targeted tariff rationalisation and procedural reforms.
  • By lowering customs duties on capital and intermediate goods, it seeks to correct distortions that discourage domestic production.
  • Measures aimed at reducing delays at ports and simplifying import procedures may improve production efficiency and trade competitiveness.
• Focus on Electronics
  • A major focus is on electronics, the sector with the highest dependence on China.
  • The proposed development of a rare rare-earths corridor across mineral-rich States aims to strengthen domestic mining, processing, and manufacturing ecosystems.
  • Continued tax exemptions for capital goods used in lithium-ion battery production further support supply chains critical for emerging industries.
• Focus on Labour-Intensive Sectors
  • The Budget also prioritises labour-intensive sectors as engines of trade integration and diversification.
  • Support for MSMEs through new industrial clusters, modernisation of legacy clusters, and improved access to capital markets could enhance productivity.
  • However, these measures alone may be insufficient without complementary investments in scale, skills, and infrastructure.

Gaps in Investment and Fiscal Coordination

• Despite its stated objectives, the Budget remains cautious in addressing India’s deficit in high-end industrial technology.
• Advanced manufacturing capabilities are closely linked to multinational firms and foreign capital. Yet net FDI inflows as a share of GDP have declined sharply in recent years.
• The Budget offers limited incentives to reverse this trend, possibly reflecting uncertainties in the global investment climate.
• The decision to allow firms in SEZs to sell part of their output domestically appears counterproductive.
• Rather than resolving export-related bottlenecks, this approach risks diluting export orientation and weakening long-term exports competitiveness.
• Another notable omission is the absence of discussion on Centre–State fiscal relations.
• With the recommendations of the Sixteenth Finance Commission forthcoming, issues of fiscal federalism and coordinated public investment remain unresolved, despite their importance in a volatile global environment.

Conclusion

• Budget 2026–27 represents a cautious but deliberate attempt to confront India’s industrial stagnation and strategic dependence on imports.
• Its focus on tariff correction, electronics manufacturing, and MSME support reflects awareness of structural constraints.
• However, the effectiveness of these measures will hinge on their detailed design and timely implementation.
• Without stronger investment momentum, renewed foreign capital inflows, and improved fiscal coordination, the ambition of transforming India’s industrial base may remain only partially fulfilled.

Normal Climatic Conditions:

• In "neutral" conditions, surface water in the Pacific Ocean is cooler in the east and warmer in the west.
• The "trade winds" tend to blow east-to-west, taking warm water from South America towards Asia.
• To replace that warm water, cold water rises from the depths — a process called upwelling.

What is El Niño-Southern Oscillation (ENSO)?

• El Niño and La Niña are two opposing climate patterns that break normal climatic conditions.
• Scientists call these phenomena the El Niño-Southern Oscillation (ENSO) cycle.
• El Niño and La Niña can both have global impacts on weather, wildfires, ecosystems, and economies.
• Generally, El Niño occurs more frequently than La Niña.

What is El Nino?

• El Niño is a climate pattern that describes the unusual warming of surface waters in the eastern tropical Pacific Ocean.
• El Niño is the “warm phase” of the ENSO.
• During El Niño, surface temperatures in the equatorial Pacific rise, and trade winds — east-west winds that blow near the Equator — weaken.
• They falter and change direction to turn into westerlies, bringing warm water from the western Pacific towards the Americas.
• The phenomena of upwelling is reduced under El Niño.
• Warm waters also carry tropical species towards colder areas, disrupting multiple ecosystems.
• Since the Pacific covers almost one-third of the earth, changes in its temperature and subsequent alteration of wind patterns disrupt global weather patterns.
  • El Niño causes dry, warm winters in the Northern U.S. and Canada and increases the risk of flooding in the U.S. gulf coast and south-eastern U.S.
  • It also brings drought to Indonesia and Australia.

What is La Nina?

• La Niña, the “cool phase” of ENSO, sees cooler than average sea surface temperature (SST) in the equatorial Pacific region.
• Trade winds are stronger than usual, pushing warmer water towards Asia.
• On the American west coast, upwelling increases, bringing nutrient-rich water to the surface.
• Pacific cold waters close to the Americas push jet streams — narrow bands of strong winds in the upper atmosphere — northwards.
• Impacts:
  • This leads to drier conditions in the Southern U.S., and heavy rainfall in Canada.
  • La Niña has also been associated with heavy floods in Australia.

Impact on India’s monsoons:

• In India, El Niño causes weak rainfall and more heat, while La Niña intensifies rainfall across South Asia, particularly in India’s northwest and Bangladesh during the monsoon.