Other BriefingsManufacturing Takes the Centre Stage in India’s Union Budget 2026-27
India’s Finance Minister Nirmala Sitharaman has presented her ninth financial budget in the Parliament on February 1, 2026. The Union Budget 2026-27 has put the spotlight on India’s manufacturing sector once again with populist measures focusing on reviving legacy industries as well as tapping into new segments such as the orange economy.
Fiscal strategy
As per the first advance estimates published by the National Statistics Office, India’s real gross domestic product (GDP) is estimated to grow by 7.4 percent in FY 2025-26, with nominal GDP growth at 8 percent. The services sector remains the primary growth driver, expanding by 9.1 percent.
|
Fiscal indicator |
FY 2025-26 Revised Estimate (RE) |
FY 2026-27 Budget Estimate (BE) |
|
Fiscal deficit |
4.4% |
4.3% |
|
Revenue receipts |
INR 33.42 trillion |
INR 35.33 trillion |
|
Net tax receipts |
INR 26.7 trillion |
INR 28.7 trillion |
|
Capital expenditure |
INR 11 trillion |
INR 12.22 trillion |
|
Total expenditure |
INR 49.64 trillion |
INR 53.47 trillion |
|
Gross market borrowing |
INR 11.7 trillion |
INR 17.2 trillion |
Source: India Union Budget 2026-27
Union Budget 2026-27: Spotlight on India’s manufacturing sector
India’s Union Budget 2026-27 has reiterated the central government’s focus on enhancing the domestic manufacturing capabilities. The national financial outlay for the financial year (FY) 2026-27 proposes interventions in six areas:
- Scaling up manufacturing in seven strategic and frontier sectors
- Rejuvenating legacy industrial sectors
- Creating champion MSMEs
- Delivering a powerful push for infrastructure
- Ensuring long-term security and stability
- Developing city economic regions
Bio-pharma
The central government has proposed to develop India as a global biopharma hub through the Biopharma Shakti initiative, with a budgetary outlay of INR 100 billion (US$1.09 billion) over five years. The strategy includes the creation of a dedicated biopharma-focused network, along with a network of 1,000 accredited clinical trial sites.
Semiconductor
The India Semiconductor Mission 2.0 will focus on industry-led research and training centres for semiconductors. In view of the progress achieved under the Electronics Components Manufacturing Scheme (ECMS), the central government has increased the ECMS budgetary outlay to INR 400 billion (US$4.36 billion).
Rare earth magnets
A new scheme has been announced for rare earth permanent magnets. The union budget proposes to support the mineral-rich states of Odisha, Kerala, Andhra Pradesh, and Tamil Nadu for establishing dedicated Rare Earth Corridors to promote mining, processing, research, and manufacturing.
Chemical parks
The central government has announced a scheme to support states in establishing three dedicated chemical parks, through the challenge route, on a cluster-based plug-and-play model. The objective is to reduce India’s chemical import dependency and gradually strengthen domestic manufacturing capabilities.
Capital goods
The Union Budget 2026-27 proposes high-tech tool rooms to be established by central public sector enterprises (CPSEs) at two locations as digitally enabled automated service bureaus that locally design, test, and manufacture high-precision components at scale and at lower cost.
A Scheme for Enhancement of Construction and Infrastructure Equipment (CIE) will be introduced to strengthen domestic manufacturing of high-value and technologically advanced CIE. This can range from lifts in a multi-story apartment to firefighting equipment, large and small, to tunnel-boring equipment for building metros and high-altitude roads.
The central government has also proposed a scheme for container manufacturing with a budgetary allocation of INR 100 billion (US$1.09 billion) over a five-year period.
Textile
For India’s textile sector, the union budget introduces an integrated program with 5 sub-parts:
- The National Fibre Scheme for self-reliance in natural fibres such as silk, wool and jute; man-made fibers; and new-age fibres;
- Textile expansion and employment scheme to modernise traditional clusters with capital support for machinery, technology upgradation and common testing and certification centres
- A National Handloom and Handicraft programme to integrate and strengthen existing schemes and ensure targeted support for weavers and artisans;
- Tex-eco Initiative to promote globally competitive and sustainable textiles and apparels;
- Samarth 2.0 to modernize and upgrade the textile skilling ecosystem through collaboration with industry and academic institutions.
With a focus on bringing value addition to technical textiles, the Union Budget proposes to set up Mega Textile Parks in challenge mode.
The central government has also announced the launch of the Mahatma Gandhi Gram Swaraj (MGGS) initiative to strengthen khadi, handloom, and handicrafts. The objective of the scheme is to streamline and support training, skilling, quality of process, and production.
Sports goods
The central government has made a note of India’s potential to emerge as a global hub for high-quality, affordable sports goods. It has been announced that there will be a dedicated initiative for sports goods that will promote manufacturing, research, and innovation in equipment design as well as material sciences.
Rejuvenation of legacy industries and creation of champion SMEs
India’s central government has announced a scheme to revive 200 legacy industrial clusters to improve their cost competitiveness and efficiency through infrastructure and technology upgradation.
For the small-micro enterprises in the country, a dedicated INR 100 billion (US$1.09 billion) SME Growth Fund is to be introduced, incentivizing enterprises based on select criteria. The Self-Reliant India Fund, initially introduced in 2021, will be allocated an additional INR 20 billion (US$218.7 million) to continue support to microenterprises and maintain their access to risk capital. The central government is to facilitate professional institutions such as ICAI, ICSI, and ICMAI to design short-term, modular courses and practical tools to develop a cadre of ‘Corporate Mitras’ (Corporate Helpers), especially in tier-2 and tier-3 towns.
Infrastructure push and multimodal connectivity
The Union Budget 2026-27 proposes a significant increase in public capital expenditure to INR 12.2 trillion (US$133.08 billion), reinforcing India’s aim for infrastructure-led growth.
Infrastructure risk guarantee framework
To crowd in private investment, the government plans to establish an Infrastructure Risk Guarantee Fund. The fund is intended to mitigate development and construction-phase risks, thereby improving risk confidence for private developers and lenders.
Monetisation of CPSE real estate assets
The budget outlines measures to accelerate the recycling of underutilized real estate assets held by CPSEs, including the creation of dedicated Real Estate Investment Trusts (REITs).
Expansion of dedicated freight corridors
To enable greener and more efficient cargo movement, new Dedicated Freight Corridors are proposed to connect Dankuni in eastern India with Surat in the west, strengthening long-haul freight connectivity across key industrial regions.
Strengthening inland waterways and coastal shipping
The central government plans to operationalize 20 additional national waterways over the next five years. The rollout will begin with National Waterway-5 in Odisha, linking mineral-rich regions such as Talcher and Angul with industrial hubs like Kalinga Nagar and ports at Paradeep and Dhamra.
Coastal cargo promotion scheme
A new Coastal Cargo Promotion Scheme will be launched to incentivize a modal shift from road and rail to coastal shipping and inland waterways. The initiative aims to increase the combined share of these modes in freight transport from 6 percent to 12 percent by 2047.
CLICK HERE: Inside India’s US$4.9 Billion Strategy to Build a Competitive Shipbuilding Industry
Developing city economic regions (CERs)
India’s Union Budget 2026-27 announces an allocation of INR 50 billion (US$545.4 million) per CER over five years. Funding will be deployed through a competitive challenge-based framework, linked to reforms and outcome-oriented performance benchmarks, to support the implementation of CER development plans.
High-speed rail as growth connectors
Seven high-speed intercity rail corridors are proposed to function as “growth connectors,” supporting sustainable passenger mobility and regional economic integration. The identified corridors include:
- Mumbai-Pune
- Pune-Hyderabad
- Hyderabad-Bengaluru
- Hyderabad–Chennai
- Chennai-Bengaluru
- Delhi-Varanasi
- Varanasi–Siliguri
Modernization of FDI regulations
One of the top highlights of the 2026-27 budget speech was the comprehensive review of the Foreign Exchange Management (Non-Debt Instruments) Rules. The finance minister has proposed to establish a more contemporary and user-friendly framework for foreign investment, aligned with India’s evolving economic and policy priorities.
India’s orange economy and creative industries
The Indian Institute of Creative Technologies, Mumbai, will be supported to establish Animation, Visual Effects, Gaming, and Comics (AVGC) Content Creator Labs across 15,000 secondary schools and 500 colleges, strengthening India’s creative and digital content ecosystem.
Direct taxes: Structural reform, compliance ease and litigation reduction
The Union Budget 2026-27 confirms the rollout of the Income Tax Act, 2025, with effect from April 1, 2026. To facilitate a smooth transition, simplified income tax rules and redesigned return forms will be notified shortly, with an explicit focus on reducing complexity and improving compliance for individual taxpayers.
TCS and TDS rationalisation to improve cash flows
The budget proposes targeted rationalization of tax collected at source (TCS) and tax deducted at source (TDS) provisions to reduce working capital blockages and procedural friction:
- TCS on overseas tour program packages will be capped at 2 percent, down from the current range of 2-20 percent.
- TCS on Liberalized Remittance Scheme (LRS) payments for education and medical purposes will be reduced from 5 percent to 2 percent.
- Simplified TDS provisions for manpower supply are proposed to support labor-intensive sectors.
- A new rule-based, automated scheme will be introduced for small taxpayers to obtain lower or nil deduction certificates, replacing the existing discretionary application process.
Tax filing and procedural simplification
Key process for the tax reforms include the following:
- Single-window filing of Forms 15G and 15H through depositories for dividends, interest, and similar income.
- Extension of the return revision deadline from December 31 to March 31, with a nominal fee.
- Staggered return filing timelines to reduce peak-time congestion.
- Replacement of TAN with a PAN-based challan for property transactions involving non-residents.
Foreign asset disclosure relief
The central government has announced a one-time six-month window to allow small taxpayers to voluntarily disclose overseas income or foreign assets to improve compliance and reduce future disputes.
Rationalised tax penalty and prosecution regime
The union budget 2026-27 adopts a corrective, litigation-light approach. India will have an integrated assessment and penalty orders under the Income Tax Act, 2025. Permission to update returns even after reassessment begins, on payment of an additional 10 per cent tax. An individual can have immunity from penalty for misreporting upon payment of additional tax.
Decriminalisation of non-production of books and TDS obligations where payments are made in kind. Retrospective immunity from prosecution for non-disclosure of non-immovable foreign assets below INR 2 million (US$21,817.34) from October 1, 2024.
India’s IT sector: Certainty and scale
The Budget Union proposes a unified Information Technology Services category covering software development, IT-enabled services, KPO, and contract research and development (R&D). A common safe harbor margin of 15.5 percent will apply. The turnover threshold for safe harbor eligibility will be increased from INR 3 billion (US$32.7 million) to INR 20 billion (US$218.17 million).
Approvals will be granted through an automated, rule-based mechanism and may be applied for five consecutive years. Unilateral APAs for IT services will be fast-tracked, with an indicative two-year timeline, extendable by six months. The facility to file modified returns on entering an APA will also be extended to associated enterprises.
Investment incentives for global firms
Foreign companies providing global cloud services using data centres located in India will be eligible for an income tax holiday up to 2047. Where such services are provided through a related Indian entity, a safe harbor margin of 15 percent on cost will apply.
A safe harbor is proposed for non-residents undertaking component warehousing in bonded warehouses, with profits deemed at 2 percent of invoice value. Non-residents supplying capital goods, equipment, or tooling to toll manufacturers in bonded zones will receive a five-year income tax exemption.
Under notified schemes, non-resident experts will be exempt from tax on global (non-India sourced) income for up to five years. Non-residents taxed on a presumptive basis will be exempt from MAT.
Indirect taxes: Tariff rationalization and trade facilitation
| Key Indirect Tax Measures Announced in Union Budget 2026–27 (Sector-wise) | |
|
Sector / area |
Description |
|
Marine, leather and textiles |
Duty-free import limit for specified inputs used in seafood processing increased from 1 percent to 3 percent of FOB export value. Duty-free import of specified inputs extended to exports of leather and synthetic footwear. |
|
Energy transition and energy security |
Continuation of basic customs duty (BCD) exemption on capital goods used in manufacturing lithium-ion battery cells. Full BCD exemption on sodium antimonate imported for use in solar glass manufacturing. |
|
Nuclear power |
Extension of existing BCD exemption on imports required for nuclear power projects until 2035, providing long-term policy certainty. |
|
Critical minerals |
BCD exemption on import of capital goods required for processing critical minerals to support domestic value addition. |
|
Biogas-blended cng |
Value attributable to biogas excluded from the assessable value for calculation of central excise duty on biogas-blended CNG. |
|
Civil and defence aviation |
BCD exemption on components and parts used in manufacturing civilian, training, and other aircraft. BCD exemption also extended to raw materials imported for manufacturing aircraft parts for maintenance, repair, and overhaul (MRO) activities by defence sector units. |
|
Electronics manufacturing |
BCD exemption on specified parts used in the manufacture of microwave ovens to promote domestic electronics manufacturing. |
|
Special Economic Zones (SEZs) |
One-time concessional duty window proposed to enable eligible SEZ manufacturing units to sell into the Domestic Tariff Area, subject to a prescribed cap linked to export turnover. |
Customs process simplification and trust-based systems
The central government will redesign customs procedures to minimize intervention and accelerate cargo movement. It will extend the duty deferral period from 15 days to 30 days for tier-2 and tier-3 Authorised Economic Operators (AEOs) and eligible manufacturer-importers.
India will increase the validity of advance rulings binding on customs from three years to five years and encourage government agencies to grant preferential treatment to AEO-accredited entities.
For trusted importers, the filing of the bill of entry and the arrival of goods will trigger automated clearance for consignments that do not require regulatory compliance. India will also transition the customs warehousing framework to an operator-centric model based on self-declaration, electronic tracking, and risk-based audits.
Enabling new export opportunities
Fish caught by Indian fishing vessels in the Exclusive Economic Zone or on the high seas will be exempt from duty, and landing such catch at foreign ports will be treated as export of goods. The existing value cap of INR 1 million (US$10,908.6) per consignment on courier exports will be completely removed, supporting small businesses, artisans, and start-ups in accessing global markets through e-commerce.
Key takeaways from India’s Union Budget 2026-27 announcements
The Union Budget 2026-27 marks a decisive reinforcement of India’s manufacturing-led growth strategy, combining large-scale public investment, targeted sectoral incentives, and deep regulatory reform. The central government’s approach is clearly multi-layered: strengthening domestic production capabilities across frontier and legacy sectors, improving infrastructure and logistics efficiency, and reducing compliance friction for businesses and investors.
A notable shift is the emphasis on scale and certainty, via through long-term commitments in sectors such as biopharma, semiconductors,textiles, sports manufacturing, etc., alongside sustained capex, multimodal connectivity, and city-centric economic development.
At the same time, reforms in direct and indirect taxation signal a move towards a simpler, trust-based, and litigation-light regime, particularly for MSMEs, exporters, the IT sector, and global investors.
Overall, the financial outlay positions India as a more competitive manufacturing and investment destination by aligning industrial policy, infrastructure expansion, tax rationalisation, and human capital development under a coherent growth framework.
(US$1 = INR 91.67)
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