Industrial Policy in Budget 2026–27 outlines a two-track manufacturing strategy—deepening capabilities in technology-intensive sectors while sustaining scale and employment in labour-intensive industries
As geopolitics and trade increasingly intersect, industrial policy is being used to build domestic capability and reduce vulnerabilities. It signals how countries intend to compete, secure, and hedge in a changing global order. The Union Budget 2026–27 reflects this emphasis, with a manufacturing focus centred on supply security, value addition, and export competitiveness.
In this context, the Budget charts a path for India to move from strategic autonomy to strategic indispensability. It prioritises domestic capability, supply security, and export competitiveness. The Budget’s manufacturing strategy is essentially two-track: deepen capabilities in strategic, technology-intensive sectors and continue impetus in labour-intensive sectors that can scale jobs and diversify exports.
The Budget’s manufacturing strategy is essentially two-track: deepen capabilities in strategic, technology-intensive sectors and continue impetus in labour-intensive sectors that can scale jobs and diversify exports.
The Budget’s industrial push can be understood through the “smiling curve” of global value chains, which shows where value is highest along the upstream (design, research and development, inputs) and downstream ends (branding, ecosystems). Pure assembly, on the other hand, captures the least value. Several Budget measures aim to pull India upward into segments where value and strategic control are higher.
The India Semiconductor Mission (ISM) 2.0 reflects this shift. India already has strengths in design services and outsourced semiconductor assembly and testing (OSAT). These create scale, but they do not anchor strategic control. By pushing fabrication and advanced packaging, the intent is to secure a foothold in the more value-intensive parts of the semiconductor stack. For an INR 1,000 crore outlay to translate into competitive fabrication, India will need anchored foreign technology partnerships and capacity building.
Complementing ISM 2.0, the Electronics Components Manufacturing Scheme targets the “missing middle” of India’s electronics ecosystem. Earlier assembly-focused interventions expanded output, but they can also keep value addition outside the country. ECMS, on the other hand, targets intermediate inputs and sub-systems, nudging India out of the low-value assembly zone toward deeper ecosystem participation and greater value capture.
The Budget’s industrial push can be understood through the “smiling curve” of global value chains, which shows where value is highest along the upstream and downstream ends.
The Budget also proposes a Scheme for Rare Earth Permanent Magnets with corridors to be developed in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. The scheme aims to localise mining, processing, and magnet manufacture — a necessary upstream move if India is to capture more value in EVs, electronics, and renewables. Between 2022-25, India imported 60-80 percent (value-wise) and 85-90 percent (quantity-wise) REPMs from China. The move is aimed at reducing this import dependence and reflects India’s geoeconomic hedge.
Figure 1: Selected Manufacturing Schemes and Value Chain Segments Targeted
Source: Compiled by Author using Expenditure Budget (2026-27) and official releases from Press Information Bureau (PIB)
Additionally, the Budget allocates Biopharma SHAKTI an INR 10,000 crore outlay over five years to build domestic biologics and expand clinical trial sites. This push is timely amid US threats of 100 percent tariffs on branded drugs that could sharply raise costs for Indian exporters unless local production expands. India has thrived as a generics hub but lags in high-end biologics. It is important to note that Biopharma SHAKTI’s success will hinge on R&D depth, global demand capture, and the ability to scale complex production.
While the Budget’s industrial push leans toward technology-intensive sectors, it also sustains support for labour-intensive industries that remain critical for employment and export diversification. The Integrated Programme for Textiles is positioned as an explicit push for an employment-intensive sector, focusing on value addition, parks, and export facilitation. Textiles also carry a strong inclusion dividend: the sector is repeatedly described in government releases as a major employment generator with a large workforce base, including a high share of women workers.
The same logic explains the Budget’s attention to sports goods. A dedicated initiative to promote manufacturing, R&D, and innovation in sports goods signals that “jobs-through-scale” is being pursued alongside frontier capability-building. This balance also aligns with the Economic Survey’s broader argument that durable export success often begins in labour-intensive sectors before economies upgrade technologically.
Ecosystems—skills, logistics, standards, finance, and research networks—are the bridges between frontier sectors and job-rich industries. Without these enablers, high-tech investments risk remaining concentrated in a few pockets, while labour-intensive sectors risk staying stuck in low-value tiers.
The proposal to revive 200 legacy industrial clusters complements this approach. Cluster-based development can raise productivity through shared infrastructure, specialised supplier networks, and knowledge spillovers. For MSMEs, clusters lower entry barriers and improve market access, enabling deeper participation in domestic and export supply chains. Strengthening traditional clusters also helps preserve region-specific manufacturing strengths, ensuring that industrial growth remains broad-based and employment-intensive rather than concentrated in a few high-tech enclaves.
The real test for the Budget lies in how well it connects high-tech ambition with broad-based industrial growth. Ecosystems—skills, logistics, standards, finance, and research networks—are the bridges between frontier sectors and job-rich industries. Without these enablers, high-tech investments risk remaining concentrated in a few pockets, while labour-intensive sectors risk staying stuck in low-value tiers. From this lens, the Budget incorporates some enabling measures. A proposed Customs Integrated System and a single digital window for multi-agency clearances can reduce friction at the border. Support for MSME receivables and compliance—via a stronger push for TReDS and a new cadre of “Corporate Mitras”—may ease liquidity stress and lower the cost of formalisation.
However, these are primarily border-process and domestic capability enablers. The export-side compliance challenge remains under-addressed. Major markets are tightening requirements on traceability, due diligence, and forced-labour risk, shaping market access and buyer decisions. Additionally, the Budget signals some sector-specific skilling and capability instruments—such as tool rooms and textiles skilling—it remains unclear how these feed into a manufacturing-linked skills pipeline. Technicians, toolmakers, process engineers, and quality specialists remain in short supply, especially in clusters tied to priority sectors.
This does not reflect a full East Asian-style export model—but it follows the underlying logic: production first, integration next, value capture over time. Whether India moves beyond assembly toward higher-value segments will depend on execution, ecosystem building, and regulatory stability.
Budget 2026–27 foregrounds capability building, particularly in manufacturing, supply-chain resilience, and export-oriented sectors. This does not reflect a full East Asian-style export model—but it follows the underlying logic: production first, integration next, value capture over time. Whether India moves beyond assembly toward higher-value segments will depend on execution, ecosystem building, and regulatory stability. The Budget signals intent; outcomes will determine credibility. In a world of fragmented trade and strategic competition, the ability to reliably produce and supply may matter as much as the ability to innovate. Budget 2026–27 suggests the Indian government recognises this shift.
Kumkum Mohata is a Research Assistant with the Centre for New Economic Diplomacy at the Observer Research Foundation.
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Kumkum Mohata is a Research Assistant with ORF’s Centre for New Economic Diplomacy. Her research interests lie in development economics, international trade, and macroeconomics, with ...
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