Budget 2026-27: How India Can Deepen Domestic Growth Engines Amid Global Headwinds

India’s economic performance in 2025 surprised many. Despite slowing global growth and fears that steep US tariffs would dent exports, the Indian economy remained resilient. The government attributes this largely to a steady reform push. As Prime Minister “Narendra Modi” recently remarked, 2025 marked a year when reforms became a “continuous national mission”. Budget 2026-27 now becomes a crucial opportunity to reinforce that momentum—by strengthening domestic drivers of growth while staying fiscally prudent.

Why Budget 2026-27 Matters for Growth Strategy

With global uncertainties persisting, India’s growth prospects increasingly depend on internal levers—public investment, industrial competitiveness, and policy certainty. The challenge before the government is to prioritise productive capital expenditure and social sector spending without derailing fiscal consolidation. Maintaining the current glide path for deficit reduction, while keeping debt risks contained, will be central to sustaining investor confidence.

Defence Spending as a Growth and Strategic Multiplier

A key recommendation for the upcoming Budget is to deepen the focus on defence. Enhancing the share of capital outlay in defence to 30%, from the 26.4% estimated for 2025-26, would strengthen both preparedness and domestic manufacturing. Higher allocations to the “Defence Research and Development Organisation”—by at least ₹10,000 crore—could accelerate indigenous innovation.

Defence industrial corridors in Uttar Pradesh and Tamil Nadu have already boosted indigenisation and production. Expanding this model to eastern India could spread manufacturing benefits more evenly while supporting regional development.

Scaling Up Defence Exports and Private Participation

Private enterprises now account for nearly 65% of India’s defence exports, signalling a structural shift away from state-dominated production. Establishing a dedicated defence export promotion council could improve coordination among armed forces, public sector units, private manufacturers, and diplomatic channels. Such an institutional push would be critical to achieving the ambitious defence export target of ₹50,000 crore by 2028-29.

Critical Minerals and the Clean Technology Transition

India’s transition to clean energy, electric mobility, semiconductors and advanced manufacturing is intensifying demand for critical minerals. The National Critical Mineral Mission, approved in early 2025, provides a strategic framework. However, its effectiveness could be enhanced by launching a dedicated tailings recovery programme to extract minerals from existing waste, supported by targeted public financing. This would reduce import dependence while improving resource efficiency.

Exports, GCCs and New-Age Manufacturing

In a challenging global trade environment, exports need renewed policy support. Increasing allocations for the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme would help exporters remain competitive. At the same time, India’s rise as a global hub for Global Capability Centres calls for clarity in transfer pricing rules. Clear guidance on acceptable models could reduce disputes and encourage further investment.

Similarly, the drone sector—seen as a future growth engine—needs scale. Raising the production-linked incentive outlay and creating a dedicated drone R&D fund could boost adoption, exports and global competitiveness.

Deepening Corporate Bond Markets and Resolving Disputes

Reducing over-reliance on banks requires a deeper corporate bond market. Policy measures such as widening the issuer base, relaxing investment caps for insurance firms, and allowing provident funds to invest in infrastructure and real estate investment trusts could unlock long-term capital.

Equally critical is addressing the backlog in tax disputes. With significant vacancies and rising pendency at the Commissioner of Income Tax (Appeals) level, a dual-track system—fast-tracking simpler cases while dedicating resources to complex ones—could ease uncertainty and improve the business climate.

Trade Facilitation and Customs Reforms

Easing restrictions on Authorised Economic Operator certification for newly incorporated firms within accredited groups would improve trade efficiency. Continuing rationalisation of customs tariffs—by reducing slabs and correcting inverted duty structures—would further support domestic manufacturing competitiveness.

Budget 2026-27 thus carries the responsibility of sustaining India’s growth momentum in a volatile world. By combining fiscal discipline with targeted reforms across defence, exports, finance and trade, the government can strengthen domestic engines of expansion and crowd in private investment, reinforcing India’s position as a resilient and competitive economy.