India is repositioning itself from a consumption-led economy to a global hub for manufacturing, services, and technology, aiming to become the world's third-largest economy by 2027. The seeds to this effect were sown years ago through initiatives such as ‘Make in India’ and ‘Atmanirbhar Bharat’. Union Budget 2026 sets the tone that India is shifting its gears towards becoming “Viksit Bharat."
One of the most underlying developments in recent years is the structural shift in India’s revenue composition. For decades, India had relied on collection through indirect taxes, be it customs, excise, and later Goods and Services Tax, which together accounted for nearly two-thirds of gross tax revenue in the early 2000s. However, the Union Budget 2026 reflects that income tax and corporate tax are now accounting for the dominant share of gross tax revenues (close to 60%), which is evident from the following chart.
Notably, this transition has not been engineered through higher tax rates, but through structural transformation in India’s economy and policy landscape. It has strengthened employment, expanded domestic production, and built robust infrastructure, the core pillars of any country’s growth model.
Building on these pillars, India has, over the last few years, positioned itself as one of the most preferred global investment destinations. These efforts have gained momentum, particularly in the post-pandemic environment, when global supply chains witnessed a major realignment. The “China plus one” strategy adopted by multinational companies has significantly accelerated this shift, with India emerging as a natural alternative. As global companies increasingly choose to manufacture within India rather than importing finished goods, India’s dependence on imports has gradually declined, while domestic value addition has strengthened.
A key catalyst behind this manufacturing-led transition has been the Phased Manufacturing Programme (PMP). By progressively increasing customs duties on finished goods while rationalising duties on parts and components, the PMP has discouraged imports of finished goods and promoted localisation. As a result, customs duties collection has naturally softened, not due to economic weakness, but because value creation has shifted within the country, strengthening the economic base. Over the five years since 2020, the compounded annual growth rate of merchandise exports has been 6.4%, and the foreign exchange reserve has increased from INR 48.5 Lakh Crore in FY 2024-25 to INR 49.7 Lakh Crore in 2025-26 (till December 2025) (as per Economic Survey 2025-26).
As a result of this localisation push, India is not only meeting internal demand but also supplying the global markets. Union Budget 2026 further reinforces this momentum by proposing measures to ease customs procedures, streamline clearances, and reduce logistics costs. Faster clearance mechanisms, digitised and single interconnected platforms are designed to simplify the supply chains and enhance competitiveness, making Indian exports more cost-efficient.
The government has further supported through Export-oriented schemes such as RoDTEP, Advance Authorisation, EPCG, EOU, MOOWR, and duty drawback, ensuring that Indian exports remain tax-neutral and globally competitive. Additionally, India’s evolving geopolitical relations and trade deals with global partners like the European Union and the United States and executing more Free Trade Agreements/Preferential Trade Agreements, have further expanded the country’s integration into global value chains.
Alongside manufacturing, India is emerging as a global services exporter and is now the world’s seventh-largest exporter of services, with its global share increasing from 2% in 2005 to 4.3% in 2024 (as noted by the Ministry of Finance in its PIB release dated January 26, 2026). Service exports, being zero-rated under GST, do not contribute directly to indirect tax collections but increase foreign exchange earnings and taxable incomes within the domestic economy.
In this backdrop, the urban employment and incomes have also gone up, particularly in salaried employment and high-value services such as IT, financial services, and professional services. These sectors generate regular, traceable incomes, significantly expanding the direct tax base. Rising household incomes have boosted personal income tax collections, while improved profitability has resulted in higher and more stable corporate tax revenues.
These trends reflect a structural transition toward an “Atmanirbhar” economy, signifying the country’s growing stature as a major Global Investment Destination.
Union Budget 2026 also marks India’s highest capital expenditure allocation to date. Unlike consumption-heavy expenditure, this capex-led approach directly lowers logistics costs, improves infrastructure and manufacturing ecosystems, and eventually reduces the cost of doing business. India is steadily bringing the fiscal deficit down, without cutting on capital expenditure. The same is evident from the charts below.
This combination is rare among large economies and signals confidence that today’s investments will generate future growth and revenues.
The strength of this year’s Budget lies in the quiet alignment between revenue, expenditure, and trade strategy. The shift from indirect to direct taxes, record capital investment, and strategic trade engagement together suggest that India is preparing not just to grow, but to lead and supply in a changing global economy. If the last decade was about building the foundations, the next is poised to be about India stepping into the role of a global provider.
About the authors: Vivek Baj is a Partner and Aman Agiwal is a Senior Associate at Economic Laws Practice.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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