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India’s economic performance in 2025 confounded many expectations. Even as global growth slowed and concerns mounted that sharp US tariff hikes would weigh on exports, the Indian economy demonstrated notable resilience. The government has attributed this outcome largely to the continuity and depth of reforms. As Prime Minister Narendra Modi recently observed, 2025 was a year when reforms evolved into a “continuous national mission”. Against this backdrop, Budget 2026–27 assumes added significance as a vehicle to reinforce that reform momentum strengthening domestic growth drivers while preserving fiscal discipline.

Why Budget 2026–27 Is Pivotal for the Growth Strategy

With external uncertainties likely to persist, India’s growth trajectory will increasingly be shaped by internal factors such as public investment, industrial competitiveness and policy stability. The key policy challenge lies in prioritising productive capital expenditure and essential social spending without undermining fiscal consolidation. Adhering to the existing deficit-reduction glide path and containing debt risks will be crucial for maintaining investor confidence.

Defence Spending as Both Strategic and Economic Lever

One of the major priorities for the forthcoming Budget should be a sharper focus on defence. Raising the share of capital expenditure in defence to 30%, from an estimated 26.4% in 2025–26, would enhance preparedness while supporting domestic manufacturing. Increasing allocations to the Defence Research and Development Organisation by at least ?10,000 crore could further accelerate indigenous innovation. The defence industrial corridors in Uttar Pradesh and Tamil Nadu have already delivered gains in indigenisation and output. Extending this model to eastern India could help distribute manufacturing growth more evenly while supporting regional development.

Expanding Defence Exports and Private Sector Role

Private firms now contribute nearly 65% of India’s defence exports, underscoring a decisive shift away from a purely state-led production model. Setting up a dedicated defence export promotion council could improve coordination between the armed forces, public sector undertakings, private manufacturers and diplomatic missions. Such an institutional mechanism would be vital to achieving the defence export target of ?50,000 crore by 2028–29.

Critical Minerals and the Clean Technology Push

India’s ambitions in clean energy, electric mobility, semiconductors and advanced manufacturing are driving up demand for critical minerals. While the National Critical Mineral Mission approved in early 2025 provides a strategic roadmap, its impact could be amplified through a dedicated tailings recovery programme to extract minerals from existing waste. Targeted public financing for such initiatives would lower import dependence and improve resource efficiency.

Supporting Exports, GCCs and Emerging Manufacturing Sectors

In a difficult global trade environment, exporters require renewed policy support. Higher allocations under the Remission of Duties and Taxes on Exported Products scheme would help sustain competitiveness. Simultaneously, India’s emergence as a preferred destination for Global Capability Centres highlights the need for greater clarity in transfer pricing rules. Clear guidance on acceptable structures could reduce disputes and encourage further investment.

The drone industry, viewed as a future growth driver, also requires scale and support. Enhancing production-linked incentive allocations and establishing a dedicated drone R&D fund could accelerate adoption, boost exports and improve global competitiveness.

Deepening Capital Markets and Resolving Tax Disputes

Reducing the economy’s dependence on bank financing calls for a more robust corporate bond market. Measures such as expanding the issuer base, easing investment limits for insurance companies, and permitting provident funds to invest in infrastructure and real estate investment trusts could mobilise long-term capital. At the same time, addressing the growing backlog of tax disputes is essential. With rising vacancies and pendency at the Commissioner of Income Tax (Appeals) level, a dual-track approach fast-tracking straightforward cases while allocating specialised resources to complex disputes could reduce uncertainty and improve the business environment.

Trade Facilitation and Customs Reforms

Relaxing norms for Authorised Economic Operator certification for newly established firms within accredited corporate groups would improve trade facilitation. Continued rationalisation of customs tariffs through fewer slabs and correction of inverted duty structures would further enhance the competitiveness of domestic manufacturing.

Budget 2026–27 therefore carries the responsibility of sustaining India’s growth momentum amid global volatility. By balancing fiscal prudence with targeted reforms across defence, exports, finance and trade, the government can reinforce domestic growth engines, crowd in private investment and strengthen India’s position as a resilient and competitive economy.

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