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.