India entered 2025 with quiet confidence—rising GDP growth, falling headline inflation, and comfortable foreign exchange reserves. The 2024-25 Economic Survey labelled FY26 prospects as “balanced.” However, the “Trump Tariff” shock of April 2025, which escalated to punitive 50 per cent duties on key Indian sectors by August, acted as a major stress test for the Indian model. India’s immediate response was to implement GST 2.0, announce reforms in four significant labour codes, and dismantle a limited number of quality control orders that acted as non-tariff barriers.
The Rupee was allowed an orderly depreciation towards Rs 92 per USD, helping to partially offset the impact of higher US tariffs, as the Economic Survey 2025-26 acknowledges. The impact of the punitive tariffs was also mitigated by a surge in exports of sectors exempt from US tariff hikes, such as electronics and pharmaceuticals, continued growth in services exports, and a pivot to non-US markets. Together, these developments contributed to robust growth, which is estimated at 7.4 per cent for FY26.
Administrative clean-up
In terms of the headline numbers, the two noteworthy areas—both important for growth—are fiscal outcomes and capital expenditures. By setting the fiscal deficit target at 4.3 per cent for 2026–27 (versus an estimated 4.4 per cent in FY26), the government is pursuing measured consolidation, with a stated aim of a Central Government debt-to-GDP ratio at 50 per cent over the medium term, versus 56.2 per cent currently.
The budget continues to anchor growth in public capital expenditures. Capital expenditure is budgeted to rise by 10 per cent in nominal terms. Overall, including grants to aid capital expenditure, the budget projects capital expenditure to reach 4.4 per cent of GDP in FY27, the highest in ten years. As always, the eventual growth impact will depend on the quality and execution of this spending.
The Budget is framed by the recent conclusion of the India–EU free trade agreement, which has direct tariff implications. While India retains high Most-Favoured-Nation duties for most partners, the FTA commits to comprehensive tariff liberalisation for EU imports, phased in over time and in some cases calibrated through tariff-rate quotas. This approach allows India to signal openness to a key partner, while preserving control over the pace of adjustment, underscoring how trade policy and the Budget’s customs framework are increasingly intertwined.
Within the Budget itself, there are selective adjustments to customs duties. It extends exemptions for capital goods used in the manufacture of lithium-ion cells and solar glass, fully exempts basic customs duty on 17 cancer drugs, and removes duties on goods required for nuclear power plants. This selective liberalisation is paired with the withdrawal of legacy exemptions for items already manufactured domestically or imported in negligible amounts.
Separately, the finance minister proposed changes in the customs duty structure targeting individuals. Halving the tariff rate on all dutiable goods imported for personal use from 20 per cent to 10 per cent will help “ease of living.”
There is a clear emphasis on reducing procedural complexity, particularly in customs processes, with the aim of limiting the scope for human intervention and interpretation. Many of the measures are aimed at helping sectors directly impacted by punitive US tariffs. For example, the export realisation period for the textile, leather, and footwear sectors has been extended from six months to 12 months, addressing the working capital stress caused by global shipping delays. For the seafood and leather segments, the duty-free import limit for essential processing inputs has been increased from 1 per cent to 3 per cent of the previous year’s export turnover, providing a critical margin buffer in a high-tariff global environment. The Rs 10 lakh value cap on courier exports has been removed, a nod to the direct-to-consumer and e-commerce ecosystem. More broadly, there are enhancements to the facilities provided to recognised importers, and a promise to recognise more importers in the risk-based import system.
“Behind the border” clean-up has been a clear priority. The Budget codifies and clarifies the GST 2.0 reforms agreed by the GST Council, which will improve procedural clarity, valuation rules and refund mechanisms, and in turn reduce compliance frictions and the informal cost of doing business. On labour, the Budget speech notes the notification of the four Labour Codes, including the 50 per cent wage definition (wages should be at least 50 per cent of total compensation). While operationalisation remains uneven across states, the direction of reform is aimed at greater predictability, cost transparency and formalisation—important considerations for investors evaluating India as a China-plus-one option.
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Unresolved tensions
However, the Budget leaves several critical issues inadequately addressed, most notably the tension between promoting MSME exports, while keeping their input costs high. For example, exporters in the textile cluster pay a five to 20 per cent MFN duty on essential industrial raw materials like Man-Made Fibre (MMF), yet face 50 per cent US tariffs on their finished products. The Budget’s response—the “National Fibre Scheme”—relies on subsidies to compensate for a distortion that could have been addressed more directly by lowering the border tariff itself. Moreover, the success of such schemes is by no means guaranteed, leaving the users of MMF, especially smaller firms, to fend for themselves.
Moreover, the sheer number of new—if well-intentioned—schemes announced raises questions about impact, risks diluting administrative focus, and reinforces the notion that structural competitiveness gaps can be fixed through programmes rather than policy correction. The textile sector, for example, now spans a dense web of initiatives: From PM MITRA and PLI to the National Fibre Scheme, Samarth for skilling, sustainability, and export facilitation.
Quality Control Orders remain a drag on competitiveness. Despite the recent withdrawal of 14 QCOs, more than 700 remain in force, raising compliance costs and delays, especially for MSMEs and users of imported intermediates. In the absence of adequate testing and certification capacity, they function less as quality safeguards and more as de facto trade barriers.
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The costs of caution
Taken together, the Budget’s choices on tariffs, administrative reform, and selective facilitation point to a clear strategy: Managing a hostile global environment through high border protection paired with cleaner, more predictable rules behind the border. This approach has delivered resilience and short-term stability, reinforced by steady capital expenditures and administrative clean-up.
The consequences are increasingly visible in India’s export performance. Labour-intensive exports such as textiles and leather continue to struggle under the combined weight of high input costs at home and rising protection abroad, while more capital-intensive ones such as electronics, pharma and engineering goods, along with the skill-intensive services sector, are performing well. Administrative efficiency and targeted schemes can ease frictions, but they cannot offset the competitiveness loss from expensive imported intermediates.
Unless the import policy becomes more open, especially for industrial inputs, the divergence in export outcomes will widen. India has weathered recent shocks better than most, but more durable and inclusive growth will hinge less on managing risk through safeguards and more on embedding the economy more deeply in global supply chains as a source of resilience rather than vulnerability.
Sanjay Kathuria is co-founder of the Trade Sentinel, a visiting senior fellow at the Centre for Social and Economic Progress, visiting professor at Ashoka University, and nonresident senior fellow at the Institute of South Asian Studies. His X handle is @Sanjay_1818. TG Srinivasan is co-founder of the Trade Sentinel, and visiting senior fellow at the Centre for Social and Economic Progress. His X handle is @tgsv. Views are personal.
(Edited by Theres Sudeep)