Budget 2026-27, Strategic Tariff Tweaks Overhaul, But Customs Reform Remains the Unfinished Revolution

Budget 2026-27, Strategic Tariff Tweaks Overhaul, But Customs Reform Remains the Unfinished Revolution

Finance Minister Nirmala Sitharaman’s Budget for 2026-27 arrived at a pivotal juncture for India’s trade policy. Fresh from the landmark conclusion of a Free Trade Agreement (FTA) with the European Union—a deal decades in the making—the budget presented a crucial opportunity to signal India’s readiness for deeper global economic integration. The customs and tariff proposals within the budget, therefore, were scrutinized not just for their fiscal impact but as a statement of India’s trade philosophy in an era of geopolitical realignment and supply chain reconfiguration. The verdict, as articulated by trade experts Ajay Srivastava and RV Anuradha, is one of prudent tactical maneuvering but strategic timidity. The budget delivers targeted, sector-specific benefits aimed at boosting strategic manufacturing and exports, yet it conspicuously sidesteps the profound, systemic reform of India’s Byzantine customs regime that is essential for true global competitiveness.

The Strategic Calculus: Targeted Liberalization for a “Make in India” World

The most significant and welcome changes in the budget are unequivocally aimed at enhancing cost-competitiveness in capital-intensive, technology-driven sectors aligned with national strategic goals. This is not a budget of broad-based consumer liberalization; it is a focused industrial policy document using the tariff tool with surgical precision.

1. Energy Security and Green Transition: The budget provides a masterstroke for nuclear energy, a sector recently opened to private investment. By eliminating basic customs duties on nuclear generation equipment, absorber rods, and project imports for plants registered until September 2035, the government offers the long-term certainty that this high-risk, long-gestation industry desperately needs. This move goes beyond a mere duty cut; it is a credible commitment to investors, reducing regulatory risk and aligning with India’s ambitions for clean baseload power.

Similarly, the green energy push is bolstered by removing duties on sodium antimonate (used in solar glass) and capital goods for lithium-ion cell manufacturing. The duty cut on monazite, a source of rare earths, is a small but symbolic step toward securing critical mineral supply chains. These measures directly lower the cost of establishing and scaling up renewable energy and energy storage manufacturing in India.

2. Defense Indigenization and Aerospace: In a deft move, the budget removes customs duties on raw materials for manufacturing and maintaining aircraft parts—including engines—for defense public sector units. This strengthens India’s Aviation Maintenance, Repair, and Overhaul (MRO) ecosystem, a high-value segment where India has natural advantages but has been hampered by cost structures. It supports the ambitious defense indigenization goals without undermining nascent domestic manufacturing, as it focuses on inputs rather than finished goods.

3. Electronics and Pharmaceuticals: The logic of encouraging deeper value addition is evident in electronics, where duties on inputs for microwave ovens and video-game consoles are exempted. In healthcare, a sector of both strategic importance and public good, duties are eliminated on 17 additional drugs, medicines for seven rare diseases, and key diagnostic components like X-ray tubes. These measures aim to reduce the cost of vital medical care and diagnostic equipment while encouraging local assembly and production.

4. Lifelines for Exporters and MSMEs: Perhaps the most impactful non-tariff measure is the removal of the ₹10 lakh per consignment limit on courier exports. This is a transformative change for India’s vast ecosystem of MSMEs, artisans, and e-commerce sellers. It allows them to ship higher-value goods through fast, efficient courier channels without being forced into slower, more complex, and costly cargo procedures. This single change could do more to democratize exports than dozens of minor tariff adjustments.

Other exporter-friendly measures include extending the period to meet export obligations under Advance Authorization from 6 to 12 months for garments, leather, and footwear (easing working capital stress) and raising duty-free import limits for seafood processing inputs. The proposed tax holiday until 2047 for foreign companies offering global cloud services from Indian data centers is a bold signal to attract investment in the digital infrastructure of the future.

The Protectionist Counterpoint: Mixed Signals and Contradictions

However, the budget’s narrative of strategic liberalization is punctuated by selective protectionism, revealing the government’s continued struggle to balance competing interests. The raising of the Basic Customs Duty (BCD) on potassium hydroxide from nil to 7.5% protects domestic producers but increases costs for downstream users in chemicals, soaps, detergents, and battery manufacturing—sectors themselves vital for ‘Make in India’.

More perplexing is the case of umbrellas. Duties on finished umbrellas are raised to 20% to curb low-priced imports, a clear protectionist move. Yet, duties on umbrella parts and accessories are also raised sharply. This creates a self-defeating paradox: it hurts domestic manufacturers who assemble umbrellas using imported components, negating the very protection intended for them. Such moves reflect an ad-hoc, product-by-product approach that lacks a coherent theory of which stages of which value chains India genuinely aims to develop and protect.

The Glaring Omission: The Unfinished Customs Reform Agenda

While the budget gets the tactics right in several areas, its fundamental failure lies in avoiding the structural overhaul of India’s customs architecture. This is the “deep reform” the authors argue is “inevitable” but remains conspicuously absent. The shortcomings are systemic:

1. Tariff Simplicity: A Maze of Complexity Untouched: India’s tariff schedule is a notorious labyrinth. Beyond the Basic Customs Duty (BCD) lie a confoundin
g array of cesses (like the Agriculture Infrastructure and Development Cess), surcharges, and special additional duties. These are layered on in ways that make the final duty liability opaque and unpredictable for traders. The budget makes no move to collapse these into a small number of transparent, final duty bands. As the authors note, with customs duties contributing a mere 6% of gross tax revenue and averaging just 3.9% of import value, the fiscal argument for maintaining such complexity is weak. The administrative and compliance costs it imposes are disproportionately high.

2. The Notification Quagmire: India’s trade policy is governed by a dense, overlapping web of notifications, exemptions, and conditionalities, many of which are not self-contained and require cross-referencing others. This creates a field day for consultants and a nightmare for small and medium enterprises. The promise of a unified, online, real-time tariff schedule—a basic transparency tool in most advanced trading nations—remains unfulfilled.

3. Procedural Inertia: Despite strong pre-budget signaling about overhauling procedures, reforms remain incremental. Critical operational reforms are missing:

• Extending the validity period for claiming benefits under schemes like the Remission of Duties and Taxes on Exported Products (RoDTEP).

• Allowing the aggregation of small-duty credits to reduce transaction costs.

• Aligning duty drawback codes with the globally standardized 8-digit Harmonized System (HS) codes to prevent classification disputes.

• Achieving true integration of the various IT systems used by Customs, DGFT, and GST networks to enable seamless data flow and reduce physical documentation.

4. The Ghost of Missions Past: The budget is silent on the progress of the Export Promotion Mission announced with fanfare in the previous budget. Despite Cabinet approval, its benefits are yet to materialize on the ground, highlighting a implementation gap between policy announcement and tangible outcome.

The Global Context: Why Deep Reform is No Longer Optional

The need for deep customs reform is urgent, not just for domestic efficiency but because of the changing nature of global trade. We are moving from an era of broad multilateral liberalization (exemplified by the WTO) to an era of geopolitically-aligned, “friend-shored” trade. The EU FTA and frameworks like the Indo-Pacific Economic Framework (IPEF) or the U.S.-led “Pax Silica” demand that India’s internal systems be agile, transparent, and predictable.

Modern global supply chains, especially in sectors like electronics, pharmaceuticals, and renewable energy where India seeks a role, operate on just-in-time principles and require customs clearance to be a swift, automated process—not a source of uncertainty and delay. India’s aspirations to be a global manufacturing hub and an alternative to China are fundamentally incompatible with a customs regime that is seen as complex and discretionary.

Furthermore, as FTAs proliferate, Rules of Origin (ROO) compliance becomes critical. A cumbersome customs administration increases the cost of proving origin, potentially nullifying the tariff advantages granted by FTAs. Simplifying customs is thus a prerequisite for benefiting from the very trade agreements India is now actively pursuing.

A Blueprint for the Necessary Revolution

Moving beyond tactical tweaks requires a holistic vision. The needed customs revolution rests on several pillars:

1. The Tariff Simplification Act: A legislative push to collapse all existing customs levies into three or four clear duty bands (e.g., 0%, 5%, 10%, 15%) with no hidden cesses. This would provide unparalleled transparency and reduce litigation.

2. A Unified Digital Trade Platform: A single window that integrates all stakeholders (customs, ports, DGFT, banks, insurers, logistics providers) and provides a real-time view of the tariff schedule, notifications, and shipment status. This should be the digital public infrastructure for trade.

3. A Trust-Based Compliance Regime: Moving from a system of pervasive scrutiny to one based on risk management and trusted trader programs (like AEO – Authorized Economic Operator). Low-risk, compliant entities should enjoy near-frictionless clearance.

4. Professionalizing the Customs Administration: Investing in continuous training for customs officials in modern logistics, data analytics, and emerging technologies like blockchain for traceability. The role must evolve from checkpoint enforcer to trade facilitator.

5. A Clear Sunset for Protection: For each protective tariff, there should be a publicly stated rationale (e.g., infant industry protection for X years, countering unfair subsidies) and a sunset clause with a review mechanism. This would impose discipline on protectionism and force a regular cost-benefit analysis.

Conclusion: From Incrementalism to Transformation

Budget 2026-27 makes intelligent, targeted moves to lower costs for strategic sectors and ease pain points for exporters, particularly MSMEs. Its focus on nuclear energy, green tech, defense, and healthcare inputs is commendable and strategically sound. The courier export limit removal is a genuinely transformative micro-reform.

However, by treating customs and tariffs as a tool for annual fine-tuning rather than an object of systemic transformation, the budget misses a historic opportunity. The conclusion of the EU FTA was the perfect moment to declare a new, simplified, and transparent trade regime fit for the 21st century. Instead, we received more of the same: a patchwork of exemptions and hikes atop a crumbling, complex edifice.

As Srivastava and Anuradha conclude, “meaningful customs reform is no longer optional.” It is the critical software required to run the hardware of FTAs, production-linked incentives, and infrastructure projects. Until India undertakes this deep reform, its ambitions of becoming a global trade powerhouse will be hampered by self-imposed friction. The budget’s tweaks are helpful, but the revolution is still awaited. The call for a continuous reform process, well beyond the annual budget ritual, is the most urgent takeaway for policymakers.

Q&A: Decoding the Customs & Tariff Reforms in Budget 2026-27

Q1: What is the overarching strategy behind the customs duty changes in Budget 2026-27, and which sectors are the primary beneficiaries?

A1: The overarching strategy is strategic, sector-specific liberalization rather than broad-based tariff reduction. The government is using the customs duty tool as an instrument of industrial policy to enhance the cost-competitiveness of capital-intensive and technology-led sectors deemed critical for national security, energy independence, and global export competitiveness. The primary beneficiaries are:

• Nuclear Energy: Full duty exemption on equipment and project imports to provide long-term certainty for private investment.

• Green Energy & Critical Minerals: Duty removal on inputs for solar glass, lithium-ion cell manufacturing machinery, and a cut on monazite to secure supply chains for renewables and energy storage.

• Defense & Aerospace: Duty exemption on raw materials for aircraft parts and engines for defense PSUs to boost the MRO ecosystem and indigenization.

• Electronics: Duty exemption on inputs for items like microwave ovens to encourage deeper domestic value addition.

• Healthcare: Duty elimination on 17 drugs, medicines for rare diseases, and key diagnostic components to reduce healthcare costs and encourage local production.

• Exporters & MSMEs: Through non-tariff measures like removing the courier export value limit and extending export obligation periods.

Q2: The budget raises duties on items like umbrellas and potassium hydroxide. Do these protectionist moves contradict its liberalization narrative?

A2: Yes, they create a contradictory and mixed signal. The protectionist moves reveal the government’s continued struggle to balance the interests of domestic producers with those of downstream users and the broader goal of cost-competitiveness. The case of umbrellas is particularly flawed: raising duties on both finished umbrellas and their parts hurts domestic assemblers who rely on imported components, thereby undermining the very protection intended. The hike on potassium hydroxide protects its producers but increases costs for vital downstream industries like chemicals, soaps, and batteries. This ad-hoc, product-level approach lacks a coherent strategy for which specific segments of which value chains need nurturing and for how long, creating policy uncertainty and inefficiency.

Q3: According to the analysis, why is India’s complex customs tariff structure economically inefficient, and what is the core argument for its simplification?

A3: India’s customs structure is inefficient due to its extreme complexity and low fiscal yield. It is a multi-layered maze of Basic Customs Duty (BCD), various cesses (e.g., Agriculture Infrastructure and Development Cess), surcharges, and conditional exemptions, governed by hundreds of overlapping notifications. This complexity imposes massive administrative costs on the government to manage and enforce, and even higher compliance costs on businesses, especially MSMEs, who must navigate this opacity.
The core argument for simplification is that this complexity serves little fiscal purpose. As the authors state, customs duties account for only ~6% of gross tax revenue and average just 3.9% of import value. Nearly 90% of import revenue comes from fewer than 10% of tariff lines. Therefore, maintaining a convoluted system for such limited fiscal returns is a net drain on the economy. Simplifying it into a few transparent duty bands would reduce costs, boost transparency, and improve ease of doing business with minimal fiscal loss.

Q4: What are some key procedural or systemic reforms in customs administration that the budget failed to address, despite prior signaling?

A4: The budget failed to address several deep-seated procedural reforms, including:

• Tariff Simplification: No move to collapse numerous cesses and surcharges into a few clear duty bands.

• Digital Transparency: No announcement of a unified, online, real-time tariff schedule to replace the current maze of notifications.

• IT Integration: No progress on integrating the IT systems of Customs, DGFT, and GST for seamless data flow.

• Exporter-Friendly Procedures: Reforms like extending the validity period for claiming RoDTEP benefits, allowing aggregation of small duty credits, and aligning duty drawback codes with 8-digit HS codes were absent.

• Implementation Lag: No update on the operationalization of the Export Promotion Mission announced last year, highlighting a gap between announcement and execution.

Q5: In the context of newly signed FTAs (like with the EU) and geopolitical supply chain shifts, why is deep customs reform considered “inevitable” for India?

A5: Deep customs reform is inevitable because the nature of global trade and India’s ambitions within it have fundamentally changed.

• FTA Effectiveness: To truly benefit from FTAs, traders must easily comply with Rules of Origin (ROO). A complex and slow customs administration increases the cost and difficulty of proving origin, which can erase the tariff advantages the FTA provides.

• Supply Chain Integration: Modern, efficient supply chains (especially in electronics, pharma, and autos) operate on just-in-time models. They require customs to be a predictable, automated, and swift facilitator, not a source of delay and uncertainty. India cannot attract high-value manufacturing without this.

• Geopolitical Alignment: Initiatives like the EU FTA and the U.S.-led “Pax Silica” framework for trusted tech partners require India to have a transparent, rules-based, and efficient trade regime. Complex, discretionary customs are anathema to the trust these partnerships require.

• Global Competitiveness: To position itself as a credible alternative to China in global supply chains (“China+1”), India must offer not just incentives but seamless operational efficiency. Customs reform is the foundational software for this hardware. Without it, India’s trade potential will remain constrained.