India’s budget 2026-27: Manufacturing push meets services reality

India unveiled an aggressive manufacturing push in its budget for fiscal 2026-27 on Sunday, allocating RS 1,000 crore for its new Semiconductor Mission 2.0 and RS 40,000 crore for electronics components, while offering tax holidays until 2047 for foreign data centres, even as services continue to outpace industry in driving economic expansion.

Finance Minister Nirmala Sitharaman’s ninth consecutive budget targets a 7.4% real GDP growth for the current fiscal year ending March 2026, but the composition reveals a persistent tilt: services are projected to expand 9.1%, while manufacturing and construction lag at 7%.

Semiconductor mission 2.0: Beyond assembly

The budget announces India Semiconductor Mission (ISM) 2.0 with an allocation of RS 1,000 crore for fiscal 2026-27, aimed at moving beyond chip packaging into equipment manufacturing, materials production, and indigenous intellectual property design.

Building on ISM 1.0’s foundation, the government has approved 10 semiconductor projects with a cumulative investment of RS1.60 trillion under the flagship RS76,000 crore India Semiconductor Mission as of January 2026. Most current projects focus on assembly, testing, marking and packaging rather than advanced fabrication.

“We will focus on equipment and materials production, develop full-stack Indian intellectual property, and strengthen supply chains,” Sitharaman told parliament, adding that industry-led research and training centres would build a skilled workforce.

More significantly, the government proposes to increase the Electronics Components Manufacturing Scheme (ECMS) outlay to RS40,000 crore, a dramatic jump from the RS22,919 crore allocated when the scheme was launched in April 2025. The scheme has already attracted 46 applications with investment commitments of Rs 54,567 crore across 11 states, double the initial targets.

Data Centres Get 22-Year Tax Holiday

In a bid to position India as “the digital backbone for the world,” the budget offers tax exemptions until 2047 for foreign companies providing cloud services globally using Indian data centres, provided they serve Indian customers through an Indian reseller.

The government also proposed a 15% cost-based safe harbour for related-party data centre services and a 2% profit margin safe harbour for component warehousing in bonded warehouses, yielding an effective tax rate of just 0.7%.

Industry data shows India generates 20% of global data but hosts only 3% of global data centre capacity. Demand is surging as AI adoption accelerates and data localisation rules tighten.

The tax holiday is aimed at attracting long-term capital. But power reliability, not tax breaks, remains the sector’s major hurdle, with investments estimated at around $70 billion flowing into AI infrastructure.

Manufacturing push meets structural limits

The budget allocated Rs 10,000 crores for Bio-pharma SHAKTI to build India into a biologics hub over five years, with three new National Institutes of Pharmaceutical Education and Research. It set aside RS1,500 crore for semiconductor components, RS1,004 crore for white goods production-linked incentives (up from RS304 crore), and RS600 crore for three chemical parks.

Mobile phone manufacturing grew 30-fold from RS18,000 crore in FY15 to RS5.45 lakh crore in FY25, with iPhone exports hitting RS2.03 lakh crore in 2025, nearly double the prior year. Yet manufacturing’s share of GDP remains stuck around 17%, far below the government’s 25% target set under Make in India in 2014.

Capital expenditure is expected to rise from Rs 11.21 lakh crore (3.1% of GDP) in FY 2025-26 to Rs 12.2 lakh crore (4.4% of GDP) in FY 2026-27. Infrastructure projects include dedicated freight corridors, seven high-speed rail corridors, and expanded national waterways.

But the budget left glaring gaps. Research and development spending remains below 1% of GDP, well short of China’s 2.4% or the US’s 3.5%. Labour law harmonisation, flexible hiring, and easier exit clauses remain politically untouchable. The National Skill Development Corporation trained just 4.3 million workers in FY24 against a 10 million target, yet skilling allocations stayed flat at RS34,000 crore.

Services: The real driver of the economy

While manufacturing grabbed headlines, services quietly dominated revenue projections. The budget forecasts services sector tax collections at RS22.1 trillion versus RS8.4 trillion from goods, a 2.6:1 ratio virtually unchanged from last year.

IT services exports alone are projected at $205 billion for FY26, dwarfing the $98 billion manufacturing export target. During April-December 2025, goods trade generated a $248 billion deficit, but a services surplus of $151.4 billion reduced the overall trade deficit to $96.6 billion.

FM Sitharaman announced a high-powered “Education to Employment and Enterprise Standing Committee” to position services as a core driver, targeting a 10% global services share by 2047. She proposed safe harbours for IT and ITeS to provide tax certainty, though details remain sparse.

Automobile Components: Tariff tweaks, not transformation

The budget offered modest customs duty relief for automobile components but no comprehensive sector strategy. It removed export courier limits, simplified baggage rules, and proposed new export opportunities for fisheries and small businesses.

The India-EU free trade agreement, finalised January 27, will slash tariffs on automobile parts over 5-10 years and reduce car tariffs from 110% to 10%, benefiting Renault, Volkswagen, BMW, and Mercedes. But the budget itself stayed silent on auto-specific manufacturing incentives beyond general PLI schemes.

Industry groups had sought inclusion in the 15% concessional manufacturing tax regime, expanded testing infrastructure, and value-addition-linked export incentives. None materialised.

Trump Tariffs: Strategic pivot to Europe

President Donald Trump imposed 50% tariffs on Indian goods in 2025, initially 25% in April, then doubled to 50% in August, citing India’s continued Russian oil purchases. India’s response in Budget 2026-27: pivot to Europe. The budget made no specific provisions to counter US protectionism. Instead, the India-EU FTA, concluded January 27, 2026, just days before the budget, signals a new strategy of diversifying trade partners rather than capitulating to Washington.

“The budget seeks to balance ambition with inclusion as India moves toward long-term development goals,” FM Sitharaman remarked, making no mention of US trade tensions.

Critical minerals push

Critical minerals and rare earths got duty exemptions on capital goods, aligning with the budget’s allocation for Rare Earth Corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. These corridors target mining, processing, and manufacturing to secure supplies for electronics and EVs.

Simplify Taxes & Tariffs

The budget proposed simplifying the tariff structure, continuing work from previous budgets to consolidate customs duty slabs from 21 to eight. But inverted duty structures, where finished goods face lower import duties than inputs, persist in textiles and other sectors, undermining domestic value addition.

Incremental ease of doing business

The budget promised “trust-based governance” through a new Income Tax Act effective April 2026, replacing a six-decade-old legislation. Minimum alternate tax will drop to 14% and become a final tax. TCS rates fall from 5-20% to 2% for overseas tour packages and from 5% to 2% for education and medical remittances under the Liberalised Remittance Scheme.

Automated, rule-based processes will replace discretionary approvals for lower or nil deduction certificates for small taxpayers. Customs clearance for Authorised Economic Operators extends from 15 to 30 days.

FM Sitharaman also announced a High-Level Committee on Banking for Viksit Bharat to review the financial sector. But execution risk looms large; India’s infrastructure projects routinely face land acquisition delays, environmental clearances, and cost overruns.

Experimental edges

The budget went into uncharted territory with RS2,100 crore for “bio-manufacturing” hubs focusing on lab-grown proteins and sustainable materials. China has invested $6 billion in this sector since 2020; India’s stake is modest but marks new thinking.

An RS1,500 crore allocation for “circular economy” infrastructure, recycling facilities, waste-to-energy plants, signals growing environmental consciousness, though implementation pathways remain vague.

The budget proposed setting up content creator labs in 15,000 schools and 500 colleges to boost the “Orange Economy”, creative industries from gaming to animation. It’s a nod to India’s demographic dividend, though whether school labs translate to globally competitive studios is another matter.

FM Sitharaman announced three new All India Institutes of Ayurveda and mental health infrastructure expansion, including NIMHANS-2. Medical tourism got a push with visa facilitation and infrastructure support, targeting India’s cost advantage in procedures from cardiac surgery to IVF.