India – Solid Budget, Encouraging Trade Deals
The key positive from the recently announced Indian FY26/27 budget is the resumption of a Government focus on capex. Driven by defence (+17%), railways (+11%) and roads (+8%), capex spending is forecast to rise 11.5% while non capex expenditure is forecast to grow a slower 5.6%. The fiscal deficit should decline 10bps to 4.3%.
The budget has also coincided with two trade deals. It took time but the long-awaited India–European Union Free Trade Agreement has been branded as the “mother of all deals.” After nearly two decades of stalled negotiations the trade agreement brings together two billion people in a trade arrangement covering approximately a quarter of global GDP. The urge to reach an agreement can only have been assisted by the unpredictable US trade policies pursued by the Trump administration over the past year.
The scale of the agreement is huge. India will eliminate or reduce tariffs on over 95% of EU exports while the EU will do the same for 99.5% of Indian goods by trade value. By embedding European regulatory standards and sustainability provisions, the agreement has the potential to influence emerging norms for digital trade, intellectual property, and responsible production across the region. Significant tariff reductions in chemicals, machinery, and pharmaceuticals will accelerate the integration of Indian firms into European value chains, while regulatory alignment in electronics and automobiles will lower the barriers to higher-value manufacturing.
These economic provisions sit alongside a broader strategic convergence. India–EU cooperation in maritime security and defence in the Indian Ocean has expanded in recent years, reflecting shared concerns over China’s growing regional presence. Trade, logistics, and security are increasingly intertwined.
The second trade deal with Trump is easier to explain. India needs to halt the purchase of Russian oil and the US import tariff will fall from 50% to 18%. Short, sharp and to the point.
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