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The Union Budget 2025 is a clear signal from the government on greater confidence in its supply chain strategy and commitment to productivity and growth. The Finance Bill has been a thorough exercise in rationalising tariffs and addressing inverted duty structures in sectors where India aims to ramp up production.
There seem to be two clear aims for the budget this year—increase consumption and ease production. The first part was seen in the revisions made to the income tax slabs. The second, to galvanise manufacturing, has been done through three major policy pushes.
First is the rationalisation of customs duties. Coming down to eight rates, even as adjustments have been made to preserve the effective duty, clarifies a lot of the noise in the Indian tariff structure. The merging down of the 150, 135 and 100 per cent tariff layer down to 70 percent is a big step forward. The effective duty remains high due to the implementation of between 7.5 percent to 20 percent, and in the case of laboratory chemicals, 70 percent for Agriculture, Infrastructure and Development Cess (AIDC) on some—not all products where rates have been reduced.
The automobile sector has seen significant reductions in tariffs, with luxury cars now attracting a duty of 70 percent over the earlier 125 percent.
A significant element of these rate cuts is the items on which rates have been reduced. The automobile sector has seen significant reductions in tariffs, with luxury cars now attracting a duty of 70 percent over the earlier 125 percent. Motorcycles have seen a 10 percent rate cut from 50 percent to 40 percent with completely knocked down (CKD) bikes at 10 per cent and semi-knocked down (SKD) bikes at 20 percent. These are essential not just for India’s manufacturing strategy, whereby the SKD and CKD bikes would ostensibly be assembled in India. It is also a significant element of international signaling with Donald Trump back in the White House. Both Tesla and Harley Davidson—companies that have become significant players in the Trump administration’s trade rhetoric when it comes to India—are likely to gain from these tariff cuts. Similarly, further rate cuts on lithium-ion and other critical minerals and components used in battery production are going to have positive implications for tech giants like Apple, and also serve India’s own goals to attract investors and manufacturers in the sector. This will, of course, have to be backed with sufficient infrastructure investment to make it easier to build manufacturing units in India. It also signals a continued push by the government to secure the supply of critical minerals and components.
With Prime Minister Modi’s upcoming visit to the United States (US) this month, it is an important signal to send to an American administration that unapologetically uses tariffs that India is willing to negotiate and ready for a mutually beneficial trade conversation. The rate cuts in the chemicals and pharmaceuticals sector also send a similar significant message.
Stepping up and completing those negotiations at the earliest is a key interest for India due to their significance as export markets for India.
Besides easing the conversation with the US, the automobile rate cuts and those in the food and beverage sector (Chapter 33) will also ease the conversation on the EU-India Free Trade Agreement and the UK-India FTA negotiation front. Stepping up and completing those negotiations at the earliest is a key interest for India due to their significance as export markets for India. When it comes to the EU, there is also the race against the upcoming implementation of the Carbon Border Adjustment Mechanism (CBAM) in 2026. While the FTA will not directly impact how India deals with the CBAM, guarantees prescribed in FTAs will clarify the business environment, especially in the face of an uncertain US trade policy.
A second landmark announcement for trade facilitation was that of Bharat Trade Net (BTN), the latest upcoming innovation from the India Stack family. An end-to-end solution to create a ‘single window’ for documentation, as with single window investment projects, is an important way to at least ease the navigation of existing red tape as the country works on reducing the same. This type of innovation will also increase the ease of doing business in the country. The kinks will lie in training the large corpus of staff from customs officials to the Directorate General of Foreign Trade (DGFT), who will have to use and implement the BTN.
The availability of high-quality insurance products with premiums invested in India will also allow for greater business interest in emerging high-risk sectors of experimental technologies.
The third major reform to the service sector is the allowance of 100 percent FDI from the earlier 74 percent in the insurance sector. This will ease the entry of businesses into India, which will no longer have to find domestic partners to service the remaining 26 percent. It will also encourage higher standards of performance for our domestic insurance sector. The availability of high-quality insurance products with premiums invested in India will also allow for greater business interest in emerging high-risk sectors of experimental technologies.
Overall, this year’s budget has done both domestic and international signaling successfully. It charts a course for India to ramp up manufacturing and gives it a better standing to negotiate with partners. It also means that the centre and state will have to step up their investment in upskilling and re-skilling the workforce, as some traditionally protected sectors are now open to competition.
Jhanvi Tripathi is an Associate Fellow at the Observer Research Foundation
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