Budget aims to rebuild India’s EM appeal

Amid mounting global trade pressures and the need to strengthen domestic consumption, key sectors such as defence, automobiles, agriculture and MSMEs remain firmly in focus this Budget season.

The government is also under growing pressure to stem the outflow of foreign capital. Against this backdrop, the Budget is being viewed as the primary instrument to restore India’s relative attractiveness vis-à-vis other emerging markets. A strong demand from investors’ “wishlist” is the reduction of Long-Term Capital Gains (LTCG) tax on listed equities back to 10 per cent.

India is transitioning its fiscal policy anchor from the fiscal deficit to the debt-to-GDP ratio. The government has set a long-term target of reducing this ratio to 50 per cent by FY31, signalling a decisive shift toward aggressive debt consolidation aimed at improving sovereign credit ratings.

Capital expenditure allocations for key sectors are expected to see a meaningful boost. Overall capex spending is projected to range between Rs 11 trillion and Rs 11.5 trillion.

Following the high-stakes Operation Sindoor in May 2025, defence spending has emerged as a priority area. With emergency procurements touching Rs 40,000 crore last year, the FY27 Budget is expected to significantly raise capital outlay for indigenous ‘Make in India’ defence technologies to sustain national security preparedness.

The Budget also places strong emphasis on creating investment-friendly ecosystems across key growth sectors. Proposed tax holidays, safe harbour margins and exemptions for data centres, cloud service providers, electronic component manufacturers and toll manufacturing are expected to enhance India’s competitiveness and catalyse foreign investment into these capital-intensive segments.

Higher safe harbour thresholds and the proposed fast-track unilateral Advance Pricing Agreement (APA) regime for IT services are likely to reduce tax litigation and improve certainty for businesses. Measures such as consolidating multiple service categories under IT services, reducing the safe harbour margin to 15.5 per cent, and introducing automated, rule-driven approval processes are expected to lower tax costs while providing greater predictability.

The Budget signals a concerted effort to curb litigation and foster a stable tax environment. Through key amendments, the government has addressed several long-standing threshold disputes affecting tax assessments.

Notably, the proposed legislation settles the debate on whether time-barring limits apply to draft or final assessment orders, retrospectively clarifying that they apply to the former.

It also resolves the ‘JAO vs FAO’ jurisdictional dispute by confirming that jurisdictional assessing officers can conduct pre-reassessment inquiries. As noted by Trilegal, the legislature has stepped in to resolve divergent judicial interpretations.

Another significant development is on procedural lapses related to the Document Identification Numbers. The proposed amendments clarify that assessment cannot be invalidated on the ground of any mistake, defect, or omission in quoting DIN, if the assessment order is referenced by a DIN in any manner. All these amendments have been brought in retrospectively. These amendments will bring much needed clarity and reduce litigation on these issues.

Overall, the Budget underscores a clear focus on the farm sector, MSMEs and employment generation, while simultaneously aiming to restore investor confidence and enhance India’s standing among emerging markets.