Union Budget 2026-27: Only a piecemeal boost for manufacturing growth

Budget 2026 advances trust-based Customs reforms and sector-specific relief, but stops short of a clear tariff-cut roadmap needed to boost MSME-led manufacturing growth

There is a broad consensus among policymakers that India’s dream of Viksit  Bharat by 2047 depends on strong, job-filled manufacturing growth led by the private  sector, with the government providing a favourable ecosystem through factor-market  reforms and by reducing logistics costs. 

On the indirect tax side, the big hope was that the government would revamp the Customs tariff and processes to aid manufacturing growth, especially in the micro, small, and medium enterprises (MSME) sector.  Unfortunately, the Budget does not provide an across-the-board cut in Customs tariffs, with the average rate still hovering around 16 per cent, higher than the 13 per cent prevalent in 2014. Even if across-the-board tariff cuts were not possible, the government could have brought down the basic Customs duty on single-use inputs and intermediates going into labour-intensive manufacturing sectors such as textiles, footwear, leather, food processing, and light engineering goods. 

Instead, the government has undertaken tariff changes in a piecemeal manner. For example, it has increased the eligible quantity of duty-free imports for exporters to 3 per cent of their FOB (free on board) value from the present  1 per cent for textiles, leather and footwear manufacturers, and exporters. It has also raised the time limit for meeting export obligations under this scheme from the present six months to one year. While these measures provide temporary relief to exporters facing weak global demand, they do not address the fundamental issue of high input costs embedded in the tariff structure. 

The important change is allowing units in special economic zones (SEZs) to sell goods in the domestic tariff area (DTA). This has been a long-standing demand of industry, which the government has approved as a one-time measure, keeping in view the turmoil in export markets. The government will bring in necessary regulations to ensure that  concessional rates do not give SEZ units an unfair advantage vis-à-vis domestic  manufacturing units. The effectiveness of this measure will, however, depend on the clarity of operational guidelines and the ease with which such DTA sales are permitted. 

The finance minister has also announced several process reforms on the Customs side, with a greater reliance on persuasion based on trust rather than on punitive action. It has been announced that authorised economic operators (AEOs)  will be allowed up to 30 days, instead of 15, for cargo clearance and will enjoy waivers from certain procedural compliances. The Budget has also incentivised  long-standing manufacturers, exporters, and government agencies to obtain AEO  certification, with an extended validation period from three years to five years. This is expected to reduce compliance costs and encourage voluntary adherence to Customs procedures. 

Similarly, quick clearance is also to be provided for electronically-sealed cargo moving directly from factories to ships. The government has also announced the framing of simplified Customs warehousing rules to reduce procedural difficulties in the storage and clearance of cargo. Procedures will also be laid down with respect to the treatment of rejected and detained goods. If implemented effectively, these reforms could help reduce dwell time and improve port efficiency. 

Similarly, goods imported without any duty liability will be given quick clearance without the requirement of filing a bill of entry. The government has also simplified tariff rates on import of goods for personal use from 20 per cent to 10 per cent. The baggage rules have also been simplified for temporary imports, besides raising the free baggage allowance limit. The government has finally also promised the  implementation of an integrated Customs system platform, which will act as a single portal for all imports.  Further, Customs duty concessions have been announced for specific sectors. Customs duty has been exempted for raw materials used in green sectors, such as battery storage, lithium-ion batteries used in electric vehicles, nuclear power, and carbon capture and storage; on capital goods where such goods are used for processing critical minerals; and on inputs used by the maintenance, repair, and overhaul sector in the aviation industry. These sector-specific exemptions are aligned with broader policy objectives relating to energy  transition, critical mineral security, and the development of supporting industrial ecosystems. 

While there have been procedural changes on the Customs side, initiating a movement  towards a trust-based system for easier clearances, the government could have laid down a broad road map for Customs rationalisation over the next five years, covering both tariffs and process reforms. 

To sum up, the Union Budget has undertaken a number of steps required to stimulate the sunrise industries of the future. What perhaps could also have been done is to outline the government’s broad strategy in critical areas such as employment generation, skilling, raising agricultural productivity, and improving human capabilities. Some of the measures and schemes outlined could have been brought within this broader framework to address these four challenges going forward.

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The author is former member of the Ce­n­tral Board of Indirect Taxes and Customs