Budget 2026-27: New playbook for trade, Customs reforms needed

A high-level committee should be set up to review India's trade and Customs regulations, and undertake economic impact analyses of trade agreements

“Economic theories teach us about the efficiency of markets, but when it comes to international business, it's the inefficiencies that often create the greatest opportunities.” — Craig Maginness in Go Glocal: The Definitive Guide to Success in Entering International Markets. 

As international trade sways the rapidly changing global order like a caffeinated businessman with a wishlist of optics and redundancies, India prepares itself for a defining Budget Day. The Budget comes at a seemingly opportune time: India has just overtaken Japan to become the fourth-largest economy in the world, its economy is expected to aerobicize by a healthy 7.4 per cent in FY2025-26, and the nation is being viewed as a priority jurisdiction for data centres and technologies of the future by leading players. However, the gung-ho vitality for India’s ascendancy must be examined from the lens of what ails and obfuscates its domestic policies to ensure a holistic investment Eden for foreign investors and institutional titans. 

The FDI-FTA connect 

Successive governments have pursued an investor-friendly Foreign Direct Investment (FDI) policy for most of the sectors to be open for 100 per cent FDI via automatic route. The writing was always on the wall: FDI inflows skyrocketed from $36.05 billion in FY2013-14 to $81.04 billion in FY2024-25, a gigantic 124 per cent increase over the last decade.  

While the 2025-26 figures are expected to repeat the magic, India’s ambitions were marred by a largely fragmented geopolitical order. Case in point: FDI inflows fell sharply to an average of $6.54 billion per month during the October to December 2025 period on account of external uncertainties, tensions around the date of finalisation of the India-US trade deal, and increased repatriation. 

Such headwinds can, however, be counteracted by India’s expansionist FDI terrain. India’s free trade agreement (FTA) with the four-nation European Free Trade Association (EFTA), under which the bloc has committed to invest $100 billion in foreign direct investment into the country over 15 years, is expected to herald sustained, all-inclusive investment. A similar commitment of $20 billion has been made by New Zealand under its trade pact with India, which is slated to be implemented in the second half of 2026.  

Are FTAs the be-all, end-all panacea to drive India’s FDI push? A vigorous examination shows India’s posturing on trade agreements leaves much to be desired. Commerce ministry data highlights an ominous chink in our previous agreements with the Asean group of South-East Asian nations, Japan and South Korea, which have tilted the trade balance sharply against India. The trade deficit with Asean widened from about $10 billion in 2017 to nearly $44 billion by October 2024. A similar pattern holds for Japan, despite India’s rising exports, with steady imports of high-value, capital-intensive goods.  

The reasons are structural and policy driven. While FTAs opened the door, mutual recognition arrangements on quality standards, certifications, rules of origin and other non-tariff barriers were not adequately negotiated in the previous rounds, resulting in signatories failing to reap the benefits of such bilateral agreements. 

A review of the Asean, Japan and Korea FTAs has brought some amends. Similarly, the recent India-UAE Comprehensive Economic Partnership Agreement (Cepa) addresses FTA glitches of the past.  

Budget 2025 mandated setting up a high-level committee for regulatory reforms under the Financial Stability and Development Council. While the Committee’s recommendations are awaited, the government should draw from its experiences to address FDI concerns in this year’s Budget. A similar high-level committee should be entrusted to review India’s trade and customs regulations and undertake economic impact analyses of FTAs and Cepas and provide expert recommendations to bolster FDI.  

Come Budget 2026, the government should push for a systemic overhaul, while also redesigning its FDI policy mandate till 2035. This new mandate should include a specific memorandum on the interplay of trade agreements, including but not limited to FTAs and Cepas, with FDI inflows. An investment- friendliness index, listing Indian states which facilitate ease of business through dedicated trade corridors, smooth compliance mechanisms, and incentives, should also form part of its course-correction measures. 

While India accelerates negotiations with the EU and the US, there is a need to internalise and improve upon its Asean experiences. In the case of the US, detailed stakeholder consultations with industry forums representing services, seafood, critical minerals, engineering goods and textiles exporters must shape India’s negotiating stance over the next fortnight. With the EU, a partner with which the trade deal seems to have been expedited, India should reimagine its focus on carbon-intensive sectors such as iron and steel and cement, especially given the EU’s push for a Carbon Border Adjustment Mechanism (CBAM).  

Such stakeholder consultations must be planned in an expeditious manner, to identify the gaps in the framework and ensure holistic, time-bound coverage before India signs on the dotted line with its hallowed partners. 

Appetite for sunrise sectors 

As India strives to achieve its vision of being the dominant market force by 2047, a gossamer opportunity lies in deepening our integration into global value chains (GVCs). Currently, around 70 per cent of global trade involves GVCs, underscoring their pivotal role in the global economy. India has made progress in accelerating its GVC blueprint in recent years, with the share of GVC-related trade in its gross trade rising from 35 per cent in 2019 to around 44 per cent in October 2025. 

However, these value chains find themselves tethered to an archaic regulatory framework, especially on business connection rules for taxation of non-resident taxpayers. Legislative clarity is a talisman to facilitate changes that are in sync with global best practices. While the expected rationalisation of safe harbours for specified industries such as electronics manufacturing remains an attempt at novelty, policymakers at the Ministry of Finance should consult partner ministries such as commerce and information technology to reorient our positions for gigantic value chains and offer investors certainty. 

Even as the world comes to terms with Artificial Intelligence, India has been a cynosure for data centres and hyper-scalers, with an eye on the 2030 agenda of $2 trillion of investments. However, the high capital demands of AI infrastructure, and a wider shift towards integrated, scaled platforms for our youthful economy needs to be coupled with exemplary straight drives from policymakers.  

Beyond the expected 20-year tax holiday and state-specific incentives, India must envisage the architecture for a comprehensive data centre policy, focussing on long-term incentives. The final text should offer a nuanced position on what constitutes data centre operations, and related clarity for non-resident taxpayers under the income-tax law. The design of this data centre playbook, along with accordant positions on how the tax framework shall accommodate these tax positions on data centres, will effectively determine the nation’s success in attracting FDIs in such growth-driven industries. 

Conclusion 

Change is an indispensable aide to innovation and societal upliftment. The Budget this year, should therefore, rise above the incantations and imperfections to consider an all-stakeholder view for businesses and policymakers.  

India must look to reorient the wheel for its trade environs, backed by a call for a high-powered committee, and a concourse to a reinvigorated FDI policy. The synergy between tax and investment has never been more apparent.  

India is similarly experiencing a huge thrust on electronics manufacturing, data centres and AI investments. These industries, backed by new-age technology and mammoth capital, have turned to policymakers in a renewed ask for certainty and rationale. The Budget should transform its status from a slew of mundane documents mirroring India’s tax and trade policy intent to being a comprehensive reckoner on how it will foster the next decade of transformation for investment, innovation, and inspiration.

   

Mukesh Butani is the managing partner and Spandana Koona a research associate at BMR Legal Advocates. The authors would like to thank Pranoy Goswami (senior associate, tax policy) for his inputs