India surpassed Japan in mid-2025 to become the world's fourth-largest economy. On February 1, 2026, Finance Minister Nirmala Sitharaman presented the Union Budget 2026, introducing a sweeping overhaul of India's tax code—the first major rewrite since 1961—while allocating a record ₹12.2 lakh crore for capital expenditure and ₹20,000 crore for carbon capture technologies. The budget came as the government faces new external pressures: the United States had imposed combined 50% tariffs on several Indian exports in 2025, yet India proved more resilient than expected. Just one day later, on February 2, India and the United States finalized a landmark trade agreement reducing U.S. tariffs on Indian goods from 50% to 18%, bringing India's trade burden in line with regional competitors. Prime Minister Narendra Modi had called the preceding Economic Survey a glimpse of the 'Reform Express,' stating India's momentum is accelerating even during difficult times.
The Budget and trade deal signal India's dual strategy: domestic structural reform combined with strategic international alignment. The new Income Tax Act, effective April 1, 2026, simplifies compliance and reduces tax burdens on middle-income earners—addressing persistent inflation pressures. Simultaneously, the trade agreement with the United States, coupled with recent free trade agreements with the European Union, United Kingdom, Oman, and New Zealand, positions India to capture supply chains relocating from China. The Nifty index surged 2.8% on February 3 following the trade deal announcement, and Goldman Sachs revised its 2026 GDP growth forecast upward to 6.9%. Yet challenges remain: agriculture still employs 46% of workers while generating only 20% of national income, and manufacturing capacity constraints persist. The Confederation of Indian Industry has proposed concrete land reforms—a GST-style land council and uniform 3-5% stamp duty rates—to unlock manufacturing's potential and sustain the 7.5% growth rate the government projects is achievable.
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Key Indicators
5.25%
Repo Rate (Unchanged)
RBI MPC unanimously voted to maintain repo rate at 5.25% on February 6, 2026, retaining neutral stance amid stable inflation and growth [22][24]
People Involved
Nirmala Sitharaman
Finance Minister of India (Presented ninth consecutive Union Budget on February 1, 2026; introduced sweeping Income Tax Act overhaul effective April 1, 2026)
V. Anantha Nageswaran
Chief Economic Adviser, Government of India (Term extended through March 2027)
Sanjay Malhotra
Governor, Reserve Bank of India (Led unanimous MPC decision to hold repo rate at 5.25% on February 6, 2026)
Narendra Modi
Prime Minister of India (Leading government response to Economic Survey 2026)
Pratul Shah Deo
BJP National Spokesperson (Commenting on Economic Survey projections)
Pankaj Chaudhary
Minister of State for Finance (Assisting with Union Budget 2026-27 preparation)
Organizations Involved
MI
Ministry of Finance, Government of India
Government Ministry
Status: Implementing Union Budget 2026; coordinating new Income Tax Act rollout effective April 1, 2026
The ministry responsible for India's fiscal policy, taxation, and economic planning.
RE
Reserve Bank of India
Central Bank
Status: MPC unanimously holds repo rate at 5.25% on February 6, 2026, after 125 bps cuts in 2025
India's central bank, responsible for monetary policy and financial system stability.
CO
Confederation of Indian Industry
Industry Association
Status: Advocating for comprehensive land reforms following Economic Survey 2026
India's premier business association representing over 300,000 companies across sectors.
Timeline
RBI Keeps Repo Rate Unchanged at 5.25%
Monetary Policy
Reserve Bank of India Monetary Policy Committee unanimously decided to maintain repo rate at 5.25% and neutral stance, signaling confidence in growth-inflation balance after 125 bps cuts in 2025.
Stock Market Surges on Trade Deal Optimism
Market Reaction
Nifty index gained 2.8% on February 3, 2026, following India-US trade agreement announcement. Indian rupee strengthened to 90.36 per U.S. dollar. Goldman Sachs revised 2026 GDP growth forecast upward to 6.9%.
India-US Trade Deal Reduces Tariffs from 50% to 18%
Trade Policy
India and the United States finalized a significant trade agreement reducing U.S. reciprocal tariffs on Indian goods from a peak of 50% to 18%, bringing India's trade burden in line with regional competitors facing 15-19% tariffs. The accord resolves months of bilateral friction and signals India's broader strategy of economic diversification.
Union Budget 2026-27 Scheduled
Upcoming
Finance Minister Sitharaman will present her ninth consecutive budget, expected to focus on consumption stimulus and labor-intensive manufacturing.
Union Budget 2026 Presented with Major Tax Code Overhaul
Fiscal Policy
Finance Minister Nirmala Sitharaman presented Union Budget 2026, introducing the new Income Tax Act 2025 (effective April 1, 2026)—the first major tax code rewrite since 1961. Budget allocates record ₹12.2 lakh crore for capital expenditure, ₹20,000 crore for carbon capture and storage, and reduces TCS rates on overseas transactions. Fiscal deficit set at 4.3% of GDP for FY27.
Budget 2026 Allocates Record Renewable Energy Funding
Energy Policy
Ministry of New and Renewable Energy (MNRE) allocations grew 24% to record high, with bulk directed to rooftop solar scheme. Import duties cut on lithium-ion cells for battery storage and solar-panel glass inputs. Budget also includes ₹2.2 billion for carbon capture technologies targeting five high-emitting sectors: power, steel, cement, refineries, and chemicals.
Budget 2026 Supports Critical Minerals and Nuclear Energy
Energy Policy
Union Budget 2026 includes support for mining and processing of critical minerals and rare earths, import duty exemptions for nuclear power equipment, and enhanced support for renewables. Measures aim to reduce India's vulnerability to supply chain disruptions and EU carbon adjustment mechanism (CBAM).
Market Rebounds on Economic Survey Optimism
Market Reaction
Indian equity markets rebounded sharply with the BSE Metal index surging 2.47% to a record high, buoyed by optimism around infrastructure spending and stable economic growth projections.
Industry Groups Propose Concrete Land Reform Framework
Policy Proposal
The Confederation of Indian Industry called for a GST-style land council for center-state coordination and uniform 3-5% stamp duty rates across states to enable manufacturing expansion.
Political Leaders React to Economic Survey
Policy Response
Ruling party leaders praised the growth projections, with BJP spokesperson calling the 7.2% forecast 'very positive.' Opposition leaders raised concerns about agricultural sector performance and state fiscal health despite optimistic national outlook.
Industry Groups Detail Budget Expectations
Policy Proposal
Major industry bodies called for GST rationalization from 8 to 4 customs duty slabs, increased R&D incentives for AI and generative AI, raising standard deduction to ₹1 lakh, and targeted technology adoption support for MSMEs.
Economic Survey 2025-26 Tabled in Parliament
Policy Document
Finance Minister Nirmala Sitharaman presented the annual Economic Survey, projecting 6.8-7.2% GDP growth for FY27 and highlighting manufacturing and land reform as keys to reaching 7.5% potential.
Prime Minister Modi Calls Survey 'Reform Express'
Government Response
PM Modi described the Economic Survey 2025-26 as a glimpse of the 'Reform Express,' stating that India's momentum is accelerating even during difficult global times.
Finance Minister Participates in Halwa Ceremony
Budget Preparation
Finance Minister Sitharaman attended the traditional halwa ceremony at North Block, marking the final stage of budget preparation and beginning the 'lock-in' period where officials remain secluded until budget presentation.
Foreign Exchange Reserves Reach $701.4 Billion
Economic Indicator
India's forex reserves stood at $701.4 billion, providing 11 months of import cover and covering over 94% of external debt, reinforcing the Economic Survey's characterization of India as an 'oasis of macro stability.'
India-EU Free Trade Agreement Reached
Trade Policy
India and the European Union announced agreement on a long-term Free Trade Agreement after 20 years of negotiations, potentially opening new export markets as the Economic Survey emphasizes manufacturing and global value chain integration.
India Concludes Three Major Trade Agreements
Trade Policy
India concluded the India-UK Comprehensive Economic Trade Agreement (CETA), India-Oman Comprehensive Economic Partnership Agreement (CEPA), and India-New Zealand Free Trade Agreement, expanding market access alongside the previously announced India-EU FTA.
Government Confirms Economy Overtook Japan
Official Statement
India's year-end economic review officially confirmed the country had surpassed Japan with GDP of $4.18 trillion.
RBI Cuts Repo Rate to 5.25%
Monetary Policy
The Reserve Bank of India reduced its policy rate by 25 basis points, completing 125 bps of cumulative cuts in 2025 and bringing rates to their lowest since July 2022.
India Becomes Fourth-Largest Economy
Milestone
India's nominal GDP surpassed Japan's, making it the world's fourth-largest economy behind the United States, China, and Germany.
Scenarios
1
Manufacturing Push Accelerates Growth to 7.5%
Discussed by: Chief Economic Adviser V. Anantha Nageswaran, government economic review, IMF analysis
India implements meaningful land reform at the state level, streamlines labor codes across major manufacturing states, and expands Production Linked Incentive schemes. Companies relocating supply chains from China choose India over Vietnam and Indonesia. Manufacturing's share of GDP rises from 17% toward the 25% target, absorbing workers from agriculture and enabling the economy to sustain 7.5% annual growth.
2
Steady Growth Continues at 6.5-7% Without Structural Reform
Discussed by: World Bank, Moody's, OECD economic outlooks
India maintains its current growth trajectory driven by domestic consumption, services exports, and digital infrastructure, but land acquisition challenges and inconsistent state-level policies limit manufacturing expansion. Agriculture continues employing a disproportionate share of the workforce. Growth remains solid by global standards but falls short of the acceleration needed to reach developed-nation status by 2047.
3
Global Shocks Derail Growth Momentum
Discussed by: Economic Survey 2025-26 risk scenarios, IMF World Economic Outlook
The Economic Survey warned that global political and economic turmoil could produce consequences 'worse than those of the 2008 global financial crisis.' Trade fragmentation intensifies, commodity prices spike, or major economies enter recession. India's export-oriented sectors suffer, foreign investment declines, and growth falls below 6%. The government's fiscal position deteriorates, limiting its ability to stimulate the economy.
4
Trade Deal Accelerates Manufacturing Relocation from China
Discussed by: Goldman Sachs, BofA Securities, Indian government analysts
The India-US trade agreement, combined with recent FTAs with EU, UK, Oman, and New Zealand, creates a competitive tariff environment that attracts multinational manufacturers seeking to diversify supply chains away from China. If coupled with state-level land reforms and labor code flexibility, India could capture significant electronics, textiles, and automotive component manufacturing. This scenario would accelerate the 7.5% growth trajectory outlined in the Economic Survey.
5
New Tax Code Implementation Faces Compliance Challenges
Discussed by: Tax professionals, industry associations, financial services firms
The new Income Tax Act 2025, effective April 1, 2026, represents the most significant tax code overhaul in 65 years. Implementation risks include software system readiness, taxpayer confusion, and potential litigation over transitional provisions. If compliance systems fail or widespread confusion emerges, the government may need to extend implementation timelines or issue clarifications, delaying intended revenue impacts.
6
Global Trade Fragmentation Limits Trade Deal Benefits
Discussed by: Economic Survey 2025-26, IMF, World Bank analysts
Despite the India-US trade agreement, ongoing geopolitical tensions and trade fragmentation could limit the deal's benefits. If major economies impose additional tariffs, capital flows become volatile, or commodity prices spike, India's export-oriented sectors may underperform. Growth could fall below the 6.9% revised forecast, constraining the government's fiscal space for capital expenditure.
Historical Context
India's 1991 Economic Liberalization
July 1991
What Happened
Facing a balance-of-payments crisis with foreign reserves covering only three weeks of imports, India pledged 67 tonnes of gold to avoid default. Finance Minister Manmohan Singh and Prime Minister P.V. Narasimha Rao dismantled the 'License Raj'—four decades of industrial controls—and opened the economy to foreign investment.
Outcome
Short Term
Foreign direct investment jumped from $77 million in 1992 to $3.6 billion by 1997. GDP growth accelerated to over 6% annually.
Long Term
India's GDP grew from $266 billion in 1991 to $4.18 trillion in 2025. The IT and services sectors emerged as global leaders, contributing over 50% of GDP.
Why It's Relevant Today
The 2026 Economic Survey's call for manufacturing and land reform echoes 1991's unfinished agenda. While services liberalization succeeded, manufacturing never matched China's growth, and land acquisition remains governed by state-level regulations that vary widely in effectiveness.
China's 1978 Economic Reforms
December 1978
What Happened
Deng Xiaoping launched 'Reform and Opening Up,' establishing Special Economic Zones in coastal cities like Shenzhen. China prioritized manufacturing exports and foreign direct investment, keeping the currency weak to boost competitiveness.
Outcome
Short Term
China attracted $194 billion in FDI between 1992-1997, compared to India's $9.4 billion over the same period.
Long Term
China's GDP grew from $150 billion in 1978 to over $19 trillion today, lifting hundreds of millions out of poverty and becoming the world's manufacturing hub.
Why It's Relevant Today
India started liberalizing 13 years after China and chose a services-led rather than manufacturing-led model. The Economic Survey's emphasis on manufacturing signals an attempt to capture supply chains leaving China, but India must overcome land, labor, and infrastructure constraints that China addressed decades ago.
India's Production Linked Incentive Scheme Launch (2020)
March 2020
What Happened
The government launched PLI schemes with ₹1.97 lakh crore ($26 billion) in incentives across 14 sectors, offering companies 4-6% of incremental sales for products manufactured domestically. The program aimed to reduce import dependence and create manufacturing jobs.
Outcome
Short Term
Major smartphone manufacturers including Apple suppliers Foxconn and Pegatron established or expanded Indian operations. Electronics production grew 146% from FY21 to FY25.
Long Term
By September 2025, PLI schemes attracted ₹2 lakh crore in actual investment, generated ₹18.7 lakh crore in production, and created 12.6 lakh jobs.
Why It's Relevant Today
The Economic Survey cites PLI success as evidence that manufacturing can scale in India with the right incentives. The question is whether land and labor reforms can extend this success beyond electronics into textiles, furniture, and other labor-intensive sectors.
