The Union Budget for 2026–27 is poised to mark a decisive shift in India’s economic policy trajectory, blending an expansive reform agenda with careful fiscal management. The government’s strategy—informally characterised as a fast-moving reform drive across sectors—signals that the coming year will prioritise structural transformation over short-term stimulus. This recalibration comes at a moment of global fragility: economic growth across major economies is slowing, trade tensions are resurfacing, and tariff pressures—particularly from the United States—are casting uncertainty over export prospects. In this context, India’s policy response is focused on strengthening domestic competitiveness, improving institutional efficiency, and reinforcing macroeconomic credibility.
The central philosophy underpinning the upcoming Budget should be that India’s next phase of growth must be driven by productivity gains, deeper manufacturing capability, and institutional reform rather than consumption-led expansion. The government’s approach should reflect a belief that regulatory simplification, infrastructure investment, and integration into global production networks can generate more durable growth than broad fiscal stimulus or aggressive tax concessions.
Trade and customs reforms are expected to play a foundational role. India’s import duty structure has long been viewed as relatively elevated compared to global benchmarks, particularly for intermediate goods that feed into domestic manufacturing. A phased rationalisation of customs duties, especially on key raw materials and components, could lower production costs and enhance the export competitiveness of Indian firms. However, the reform effort should extend beyond tariff reductions. Streamlining procedures, reducing classification disputes, and limiting exemptions could help address compliance complexity, which often poses a greater burden on industry than duty rates themselves. By targeting both tariff and non-tariff frictions, policymakers can aim to position India more effectively within global value chains.
At the same time, the government must strengthen domestic production capabilities in selected strategic sectors. Plans to promote manufacturing across roughly 100 product categories indicate a calibrated industrial policy designed to reduce import dependence while building resilience against external shocks. This is not a retreat into protectionism, but rather an attempt to balance openness with strategic depth.
Reform of the export ecosystem is another priority area. India’s current framework—encompassing Special Economic Zones, Export Oriented Units, and warehouse-based manufacturing regulations—has evolved in a piecemeal fashion, resulting in overlapping rules and administrative fragmentation. Consolidating these into a unified export and manufacturing framework could reduce compliance burdens, improve clarity, and enhance scale efficiencies. Facilitating greater access to the domestic market for such units may also help firms manage volatility in global demand and tariff barriers.
Green industrial policy should gain prominence as well. Expanding incentive schemes to cover upstream components of the solar value chain—such as polysilicon and wafers—could suggest a move toward deeper manufacturing integration rather than reliance on assembly. Encouraging investment in green hydrogen through accelerated depreciation or similar measures could align environmental objectives with industrial strategy, signalling that decarbonisation is increasingly seen as an engine of growth and technological leadership.
In the energy sector, reforms targeting power distribution are expected to resurface. Persistent financial stress among distribution companies has long constrained the broader power value chain. Legislative changes aimed at opening distribution to greater competition and linking financial restructuring to reform milestones could help address systemic inefficiencies. If effectively implemented, such measures may unlock new investment in generation and transmission, particularly in renewable energy.
Financial sector liberalisation may complement these efforts. Measures to attract greater foreign investment into public sector banks and other institutions could deepen capital markets and strengthen credit availability. Enhancements to the business environment—such as expanding the scope of the National Single Window System and integrating more agencies into digital compliance platforms—aim to reduce procedural friction across the investment lifecycle.
Urban and environmental policy reforms should also on the horizon. A national framework for data centres could position India as a digital infrastructure hub, while legislation on slum redevelopment may address urban inequality while stimulating construction and services. A comprehensive environmental policy could bring coherence to fragmented climate regulations, potentially unlocking green investment opportunities.
Despite the breadth of the reform agenda, fiscal realities impose clear limits. Economists generally agree that while some fiscal room exists for 2026-27, it is constrained by macroeconomic uncertainties and the government’s medium-term debt reduction goals. Budget projections are likely to be built on moderate expenditure growth, cautious tax buoyancy assumptions, and nominal GDP growth near double digits. If the fiscal deficit is maintained around 4% of GDP, only modest additional headroom may emerge.
How this space is used will be critical. Allocating it toward reducing public debt rather than expanding spending would accelerate the decline in the debt-to-GDP ratio, reinforcing a shift toward a debt-focused fiscal framework. This approach aligns with the government’s objective of bringing the debt ratio closer to 50% of GDP over the medium term, strengthening fiscal credibility and preserving policy flexibility in the face of global shocks.
Public capital expenditure remains the cornerstone of growth strategy. Infrastructure spending—covering transport, logistics, and energy—has strong multiplier effects and can crowd in private investment. However, absorption capacity remains a persistent constraint. Historical patterns show that a portion of allocated funds often goes unspent due to administrative delays and implementation bottlenecks. These underspending trends create implicit fiscal buffers but also highlight systemic inefficiencies that reforms in governance and project execution must address.
Tax policy is unlikely to deliver major stimulus. Following earlier rounds of tax rationalisation, further rate cuts could strain revenues without guaranteeing proportional growth gains. As a result, expenditure composition rather than tax relief is expected to drive policy support. Targeted revenue spending may be directed toward agriculture, small enterprises, and export-oriented sectors, while gradual subsidy rationalisation—particularly through direct benefit transfers—could create space for productive investment.
Borrowing needs will remain significant, necessitating close coordination between the government and the central bank to ensure stable market conditions. Reforms in state borrowing mechanisms and active liquidity management will be essential to prevent crowding out private credit.
State-level capacity building forms another strand of the reform narrative. The continuation of long-term, interest-free capital loans (Rs 1.5 lakh crore in FY26) to states highlights the Centre’s strategy of encouraging subnational investment while retaining fiscal oversight. Alongside financial support, the government should consider frameworks to strengthen institutional capacity in states, focusing on service delivery, governance quality, and outcome-based implementation. The effectiveness of public spending depends as much on administrative capability as on budgetary allocations.