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India's 2026-27 budget prioritizes infrastructure and domestic manufacturing
Finance Minister Nirmala Sitharaman presented India's annual budget for the fiscal year 2026-27 on Sunday, outlining increased spending on infrastructure and measures to strengthen domestic manufacturing amid global economic uncertainties.
Economic outlook and fiscal targets
India is projected to close the current financial year with a 7.4% GDP growth, according to the Economic Survey. However, growth is expected to moderate next year due to the impact of 50% tariffs imposed by U.S. President Donald Trump on Indian exports.
The budget emphasizes fiscal restraint, targeting a reduced deficit for the upcoming year. The government aims to lower the debt-to-GDP ratio from 56% to 50% (±1%) by 2030-31, providing flexibility for capital expenditure. For the next fiscal year, the debt-to-GDP ratio is estimated at 55.6%, with the fiscal deficit projected to narrow from 4.4% to 4.3% of GDP.
Infrastructure and defense spending surge
Capital expenditure for infrastructure projects, including roads, ports, and railways, has been raised by 9% to ₹12.2 trillion ($133.1 billion; £105 billion) for the fiscal year starting April 1. Defense allocations have also increased by over 20%, reflecting heightened global geopolitical tensions.
Focus on strategic manufacturing sectors
The government plans to expand manufacturing in seven key sectors, including semiconductors, data centers, textiles, and rare earth minerals. Dedicated corridors for rare earth minerals will be established in Tamil Nadu, Kerala, Andhra Pradesh, and Odisha, following a ₹73 billion scheme approved in November.
A second semiconductor mission, with a $436 million outlay, aims to produce equipment, materials, and design full-stack intellectual property.
Incentives for data centers and textiles
Foreign cloud companies investing in India's data centers and providing global cloud services will receive a tax holiday until 2047. This move is expected to attract further investment, building on recent commitments such as Google's $15 billion facility in southern India.
"Long-term fiscal certainty significantly improves investment viability and accelerates capacity creation in this capital-intensive sector," said Ritika Loganey Gupta of Ernst & Young India.
New mega-textile parks are also announced to bolster India's export competitiveness, particularly in labor-intensive garment industries, following the recent India-EU free trade agreement.
Trade measures and tax adjustments
To counter slowing exports due to U.S. tariffs, the budget raises limits on duty-free inputs for sectors like seafood and exempts customs duties on materials used in lithium-ion battery production. However, no direct tax cuts for personal incomes were introduced, as the government had already raised income tax exemption limits last year, making earnings up to ₹1.2 million tax-free.
Market reaction and concerns
Financial markets, which traded specially on Sunday for the budget announcement, fell sharply after the government increased the Securities Transaction Tax (STT) on futures and options trading.
"This hike, following last year's increase, is likely to raise costs for traders, hedgers, and arbitrageurs, potentially cooling derivative activity and reducing volumes," said Shripal Shah, Managing Director and CEO of Kotak Securities.
