India’s Finance Minister Nirmala Sitharaman has presented her annual budget for 2026-27, announcing higher infrastructure spending and measures to support domestic manufacturing amid rising global uncertainties.
India is expected to close this financial year with 7.4% gross domestic product (GDP) growth according to the country’s Economic Survey, but economic expansion will slow slightly next year as US President Donald Trump’s 50% tariffs on Indian exporters start taking a greater toll.
The budget has laid 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.
Here are five key takeaways from the budget announcements:
Record infrastructure spending, higher defence outlays
Infrastructure such as road, port and railway projects has been a mainstay focus of the Narendra Modi government for the past decade, and this budget continues to expand allocations to these sectors.
The capital spending target for the upcoming financial year beginning 1 April has gone up some 9% to 12.2tn rupees ($133.1bn; £105bn) from 11.1tn rupees.
Outlays for defence have also jumped by over 20% in the backdrop of heightened geopolitical tensions globally.
Hindustan Times via Getty Images A view of a newly inaugurated multi-lane highway near Delhi on 17 August 2025 Hindustan Times via Getty Images
The budget has continued to lay emphasis on infrastructure-led capital expenditure
Manufacturing push in strategic sectors like rare earths, semiconductors
The government has proposed to scale up manufacturing in seven strategic sectors including semiconductors, data centres, textiles and rare earths, amid slowing private investments and a flight of foreign capital from India.
Sitharaman announced that dedicated corridors will be set up for rare earth minerals in four states, including Tamil Nadu, Kerala and Andhra Pradesh in the south and Odisha in the east. The announcement follows India’s approval of a 73bn-rupee rare earths scheme unveiled in November.
The budget also launched a second semiconductor mission with an outlay of $436m to produce equipment and materials and design full-stack intellectual property.
India is also 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 $15bn investment in a facility in southern India.
This provides “long-term fiscal certainty for a highly capital-intensive sector, significantly improving investment viability and accelerating capacity creation”, said Ritika Loganey Gupta of Ernst & Young India.
The budget has also announced new mega-textiles parks to enhance India’s exports competitiveness in the labour-intensive garments industry – expected to benefit from greater global market access following last week’s India-EU free trade agreement.
No new tax giveaways
Amid slowing exports because of US tariffs, India 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.
But no direct tax cuts have been announced on personal incomes. This was expected as Modi’s government had raised income tax exemption limits last year, making earnings of up to 1.2m rupees – 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.
Fiscal restraint
Starting April 2026, the 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.
The government now aims to bring down this ratio from 56% to 50% (+/-1%) 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 estimated to come down from 4.4% to 4.3% of GDP.
AFP via Getty Images A digital screen displays a broadcast of the budget speech by Indian Finance Minister Nirmala Sitharaman (unseen) as Prime Minister Narendra Modi (R on screen) gestures. AFP via Getty Images
The markets plunged because of a hike in the Security Transaction Tax
Markets disappointed
Despite strong signalling on fiscal discipline, the financial markets, which were open in special trading on Sunday because of the budget, fell sharply as the Securities Transaction Tax (STT) on futures and options trading was raised.
“Coming on top of last year’s hike, this is likely to raise impact costs for traders, hedgers and arbitrageurs. This could cool derivative activity and lead to a reduction in volumes,” said Shripal Shah, managing director and CEO of Kotak Securities.
BBC