Budget as Trade Policy: A Practical Roadmap for Global Integration

Union Budget 2026–27 is best read as a statement of intent on trade. It signals that the government no longer sees trade agreements as stand-alone diplomatic achievements, but as commitments that must be backed by domestic policy. In that sense, this Budget marks a quiet but important shift.

Instead of focusing primarily on short-term stimulus or redistribution, it seeks to align tax policy, customs administration, manufacturing incentives, and services regulation with India’s recently concluded Free Trade Agreement with the European Union. The underlying message is clear: market access will matter only if domestic institutions are prepared to support it.

This approach is most visible in the Budget’s treatment of customs duties and trade facilitation. Reductions in duties on inputs used in electronics, defence maintenance, aircraft components, seafood processing, footwear, and textiles closely mirror sectors where the FTA offers immediate opportunities.

For exporters, however, tariff cuts are only part of the story. Delays, paperwork, and uncertainty often matter more than headline rates. Measures such as extended export timelines, deferred duty payments, and expanded duty-free input limits therefore deserve attention. They address everyday frictions that determine whether firms can meet delivery schedules and quality standards.

Over time, such reforms may do more for competitiveness than any single incentive scheme.

The Budget also reflects an effort to move India up the value chain. Initiatives under the Electronics Components Manufacturing Scheme, the Semiconductor Mission, and biopharma and chemical park programmes are designed to attract technologically intensive investment.

At the same time, sensitive sectors such as agriculture and dairy have been insulated from sudden exposure. This reflects political caution, but also economic realism. Trade integration is sustainable only when domestic adjustment is manageable.

Tax exemptions for suppliers of capital goods, safe harbour provisions for warehousing, and customs relief for critical minerals further lower entry barriers for European firms. These measures are less visible than tariff cuts, but they shape investment decisions.

Trade Orientation
Services liberalisation emerges as another pillar of the Budget’s trade orientation. The rationalisation of IT services under a single category with a common safe harbour margin, expansion of safe harbour thresholds, and tax holidays for foreign cloud service providers operating India-based data centres reflect a policy intent to position India as an increasingly attractive destination for services exports and digital infrastructure investment.

For many foreign firms, tax uncertainty has long been a greater deterrent than market access. By offering clearer rules, the Budget addresses this concern directly. Initiatives in medical tourism, allied health, and skill development also seek to expand India’s presence in global services markets.

From a macroeconomic perspective, the Budget maintains fiscal discipline while creating space for capex-led growth. The fiscal deficit target of 4.3% of GDP, a declining debt-to-GDP trajectory, and continued emphasis on effective capital expenditure reflect prudence rather than austerity. This restraint enhances the credibility of India’s external commitments by reassuring trade partners that liberalisation will not be reversed under fiscal stress. 

Macroeconomic stability, in this context, becomes part of trade strategy.

Yet deeper integration also creates pressures. Smaller firms face higher compliance costs. Traditionally protected sectors face gradual erosion of insulation. The ₹100 billion SME Growth Fund and the expanded TReDS framework are therefore crucial. Without such support, adjustment costs could undermine political and economic support for openness.

By strategically utilising customs exemptions and tax incentives, the Budget prioritises long-term export-led growth. This investment in competitiveness is designed to broaden the economic base and enhance future fiscal resilience as India integrates into global value chains. 

The distribution of gains also remains uneven. While the immediate gains of the FTA are most visible in high-growth manufacturing and services, the Budget ensures that agriculture remains a stable pillar of the economy, with the potential to benefit from secondary trade effects and improved supply chain infrastructure over time. 

Despite these challenges, the strategic coherence of the Budget is notable. By aligning domestic reforms with FTA commitments, the government has signalled seriousness about implementation. This matters not only for the EU, but for future trade partners as well.

It reduces the risk that agreements remain symbolic. It increases the likelihood that they shape investment and production decisions.

Union Budget 2026–27 should therefore be seen as a trade-enabling Budget. Its main achievement is not any single provision, but the way multiple instruments have been brought together around a common objective.

Whether this strategy succeeds will depend on execution. Regulatory capacity, coordination among agencies, and consistency over time will matter more than announcements. If these conditions are met, the Budget can support export growth, attract sustained investment, and strengthen India’s position in global value chains. 

This article is a shortened version of a longer report prepared by students of the Madras School of Economics. The views expressed are personal and do not reflect those of the Institute.