Budget 2026-27: Why Reform Momentum Matters More Than Ever as Growth Surprises

As preparations for the 2026–27 Union Budget gather pace, India finds itself navigating a fraught global environment marked by geopolitical tensions and steep US tariffs. Yet, amid these headwinds, the first advance estimates for 2025–26 have delivered an unexpected boost: GDP growth is projected at 7.4 per cent, sharply higher than the earlier 6.5 per cent forecast by the Reserve Bank of India. The numbers offer not just relief, but a clear message — structural reforms are paying off, and accelerating them is key to sustaining high growth.

A Growth Upside That Defied Expectations

The advance estimates suggest a decisive turnaround in economic momentum. Growth in the first half of 2025–26 was particularly strong, with rates of 7.8 per cent and 8.2 per cent in the first two quarters. While the second half is expected to moderate to around 6.9 per cent, the overall picture remains robust.

Equally significant is the step-up in average growth over the past three years, hovering close to 8 per cent. This trajectory strengthens the case that India may be breaking out of its post-pandemic recovery phase into a more durable growth cycle — provided reform momentum is not allowed to fade.

GST Restructuring: A Reform Long Overdue

Among the reforms underpinning this performance, the restructuring and recalibration of the Goods and Services Tax stand out as a game-changer. The simplification of rates and procedures has eased long-standing regulatory complexity, improving compliance and lowering transaction costs.

The payoff became visible during the festival season of October–November 2025, when consumption surged, providing a demand-side push that now appears to be reviving the investment climate. That GST reform took years to materialise only underlines a recurring policy lesson: delay in addressing known bottlenecks comes at a high economic cost.

Labour Codes and the Promise of Regulatory Clarity

Another long-pending reform finally implemented is the set of four labour codes passed by Parliament five years ago. These codes replaced 29 fragmented laws, many dating back to the colonial era, which had made labour compliance opaque and burdensome for employers.

While the labour reforms may not have delivered an immediate growth spike, they have introduced clarity and predictability in an area that consistently worried investors. By allowing greater flexibility, recognising work-from-home arrangements, and extending social security to gig and platform workers, the codes have nudged India’s labour framework into the modern economy. Gaps remain, but the removal of outdated legislation has undeniably improved the ease of doing business.

Manufacturing’s Rebound — and the Warning Signs

The advance estimates also point to a sharp rebound in manufacturing growth, from 4.5 per cent to 7.4 per cent, making it a key driver of overall GDP expansion. This revival is encouraging, especially as manufacturing is central to absorbing labour and strengthening export competitiveness.

Yet, not all signals are positive. Growth has slowed in the latter half of the year, highlighting the fragility of momentum amid global uncertainty. Projections for 2026–27 by institutions such as the World Bank remain conservative at around 6.5 per cent, reflecting caution about external demand and trade disruptions.

Trade Headwinds in the Age of Trump

External risks loom large as the Budget is framed. Trade has emerged as the biggest fault line, shaped by US President Donald Trump’s unpredictable economic and foreign policies. Indian exports to the US now face tariffs as high as 50 per cent, alongside threats of penal tariffs on countries trading with Iran.

The long-discussed India–US trade pact remains stuck, bogged down by multiple issues, including Trump’s personal style of negotiation. Optimistic signals from the new US Ambassador to India, Sergio Gor, offer some hope, but the Budget must prepare for a less benign external environment by supporting export-oriented industries.

Exports Show Resilience Despite Barriers

Surprisingly, export performance has held up better than expected. Data for November 2025 shows a 19 per cent jump in exports, driven by electronics, engineering goods, pharmaceuticals, petroleum products and readymade garments.

Most striking is the 22 per cent rise in exports to the US despite high tariffs. Mobile phone exports, in particular, tripled within a year, underscoring the growing role of electronics manufacturing in India’s export basket. Rapid market diversification has also cushioned labour-intensive sectors such as garments and gems and jewellery from immediate shocks.

Jobs: The Growth Blind Spot

What headline GDP numbers fail to capture adequately is India’s employment challenge. According to the Centre for Monitoring Indian Economy, unemployment fell to a three-month low of 8.6 per cent in December, aided by reduced rural joblessness. But this masks deeper structural issues.

India has yet to fully harness its demographic dividend. Agriculture still employs about 45 per cent of the workforce, while manufacturing has not expanded enough to absorb either unskilled or skilled labour entering the market. Lessons from East and Southeast Asia — particularly the role of small and medium enterprises in labour-intensive manufacturing — remain only partially applied.

What the Budget Must Deliver

For Finance Minister Nirmala Sitharaman, the 2026–27 Budget presents a narrow but crucial window. To sustain growth closer to 7.5–8 per cent — levels needed to escape the middle-income trap and meet the 2047 developed-nation ambition — reforms must accelerate.

The labour codes can help unlock employment by reducing compliance frictions, but they are only one step. The bigger task is to remove what many describe as “regulatory cholesterol” across sectors. Faster approvals, simpler rules and predictable enforcement will be essential to crowd in private investment.

The advance estimates offer optimism, but also a warning. Growth has responded where reforms were bold and decisive. The Budget’s real test will be whether it extends that urgency to the many remaining bottlenecks — turning a cyclical upswing into sustained, job-rich growth.