By P.K.Balachandran/Sunday Observer

Colombo, January 8 – India’s national budget for 2026-27, presented to parliament on February 1 by Finance Minister Nirmala Sitharaman, announced higher infrastructure spending and measures to support domestic manufacturing amidst rising global uncertainties created in a large part by the weaponisation of tariffs by US President Donald Trump.  

The other notable feature of the budget is fiscal restraint after a slew of tax giveaways in 2025.

India is expected to close this financial year with 7.4% Gross Domestic Product (GDP) growth, according to the country’s pre-budget Economic Survey.

But economic expansion will slow slightly in 2027 as President Trump’s 50% tariffs kick in.  Unfortunately for India, Trump has reduced the tariffs to 18%, but on the condition that India stops buying Russian oil and buys American or Venezuelan oil. He has also demanded that India allow US goods at zero duty and into the politically sensitive agricultural sector. Given all these conditions, many wonder if India will see the US tariffs coming from 50% to 18%.

The budget has placed a strong emphasis on fiscal restraint, targeting a lower deficit for the upcoming financial year. The fiscal deficit is the gap between the government’s total expenditure and its total revenue.

Key Takeaways

There will be record spending on infrastructure. Defence outlays are high, given the May 2025 war with Pakistan, which was expensive given the fact that it was an air and missile war. India had lost one to 6 fighters, and there is a huge defence purchase programme given the need to make up for the war losses and also to match Pakistan and China, which act in coordination against India.

 As before, infrastructure such as roads, ports and railway projects will remain the mainstay focus of the Narendra Modi government. The current budget has expanded the allocations for these sectors.

The capital spending target for the upcoming financial year beginning 1 April has gone up by 9% to US$ 133.1 billion. Outlays for defence have also jumped by over 20% in the backdrop of heightened geopolitical tensions globally.

Manufacturing push is in strategic sectors like rare earths and semiconductors. The government has proposed scaling up manufacturing in seven strategic sectors, including semiconductors, data centres, textiles and rare earths. This has been done because ing private investments have slowed and there has been a flight of foreign capital from India.

Finance Minister Nirmala Sitharaman announced that dedicated corridors will be set up for rare earth minerals in four states, including Tamil Nadu, Kerala and Andhra Pradesh in South India and Odisha in the East. The announcement follows India’s approval of a INR 73 billion rare earths scheme unveiled in November 2025.

The budget also launched a second semiconductor mission with an outlay of US$ 436 million to produce equipment and materials and design full-stack intellectual property.

India is proposing a tax holiday up to 2047 for foreign cloud companies making data-centre investments in the country and providing cloud services to customers globally.

India has been attracting billions of dollars of data centre investments, with the likes of Google last year announcing a US$ 15 billion investment in a facility in Andhra Pradesh in South India.

This provides “long-term fiscal certainty for a highly capital-intensive sector, significantly improving investment viability and accelerating capacity creation”, the BBC quoted Ritika Loganey Gupta of Ernst & Young India.

The budget has announced new mega-textiles parks to enhance India’s export competitiveness in the labour-intensive garments industry – expected to benefit from greater global market access following last week’s India-EU free trade agreement.

With US tariffs slowing exports, the Indian government has proposed raising limits on duty-free inputs for industries such as seafood, which are major export sectors. Customs duty exemptions have also been allowed for inputs used to manufacture lithium-ion batteries.

No Direct Tax Cuts

But no direct tax cuts have been announced on personal incomes. This was expected because the government had raised income tax exemption limits last year, making earnings of up to INR 1.2 million – excluding special rate income like capital gains – entirely tax-free. There was also a rationalisation of the Goods and Services Tax (GST), leaving little fiscal room for fresh cuts.

Debt to GDP Ratio to be Brought Down

The Indian government has shifted from targeting a rigid yearly fiscal deficit – the gap between revenue and expenditure – to focusing on the overall Debt-to-GDP ratio, which is a country’s total government debt to the size of the economy.

A fiscal deficit refers to the shortfall in a government’s revenue compared to its spending during a certain period. When a country runs a fiscal deficit, it means the government spends beyond its means. Fiscal deficits are calculated either as a percentage of a country’s gross domestic product (GDP) or by determining the amount of spending over revenue.

The debt-to-GDP ratio measures the proportion of a country’s national debt to its Gross Domestic Product. The higher the ratio, the higher the country’s risk of default.

The government now aims to bring down this ratio from 56% to 50%  by 2030-31. This will give Delhi more flexibility to spend on higher capital expenditure and adapt its spending needs more effectively, according to economists.

The Debt-to-GDP ratio for the upcoming financial year is estimated to ease to 55.6%, and the fiscal deficit is estimated to come down from 4.4% to 4.3% of GDP.

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