Finance Minister Nirmala Sitharaman may seek to reinforce the external firewalls of the Indian economy and financial system by taking concerted steps in the Union Budget for FY27 to arrest capital outflows and boost forex inflows into the current account, according to sources privy to the government’s thinking on the matter.
The budgetary measures would complement the ongoing aggressive import tariff liberalisation through free trade agreements (FTAs), with sweeping Customs duty cuts under the most favoured nation (MFN) route.
Global headwinds, caused primarily by the whimsical policies of the Trump administration –including a hefty 50% tariff on Indian goods in the US markets–have changed the context of the upcoming Budget significantly, the sources said.
The trend of capital flight, which now looks persistent, is proving to be both the cause and effect of the rupee’s fall against the US dollar, they said.
Managing Rupee Depreciation
Though there will be no change in the stated policy to allow the rupee’s value to be market-determined, policymakers have taken note of the rising costs of imported machinery and intermediates caused by the weaker local currency , and its dampening impact on the investment climate.
“What is causing concern is that foreign direct investment (FDI) and portfolio inflows have slowed at a time when domestic savings aren’t very robust. This can hit capital formation,” said a source.
According to the sources, the Budget might double down on structural reforms rather than short-term stimuli to the economy. While still placing robust domestic demand at the centre of the growth strategy, steps would be taken to prevent the external sector from being a bigger drag on growth in the short term.
The shift to a debt-anchored fiscal policy is seen to have given the minister additional leeway, helping her keep budgetary capital expenditure for the next fiscal as well at relatively higher levels.
Proposed Policy Measures
The policy measures likely to be announced by the minister include customs duty rationalisation on key inputs, higher budget outlays and credit to promote exports, power sector reforms through the proposed Electricity (Amendment) Bill, financial sector liberalisation including further consolidation of public sector banks (PSBs) and higher FDI in PSBs, deepening of bond market, and a revamp of the National Single Window System.
Expanded MSME support, youth employment initiatives, and better alignment of rural livelihood programmes are also expected in the Budget.
In pre-Budget discussions, economists highlighted that trade barriers are often deployed to advance deeper strategic goals — from industrial reshoring and supply-chain realignment to currency influence and geopolitical leverage.
India’s response should therefore be measured in the near term while accelerating reforms that align with evolving global trade dynamics, they pointed out.
Taken together, economists said, the Budget must balance fiscal consolidation with a capex-led growth strategy and a broad reform push — positioning India to convert today’s tariff turbulence into long-term trade gains.
Enhancing Global Competitiveness
Ajit Pai, strategy lead partner at EY GPS, said the Budget must prioritise competitiveness over consumption support. Last year’s GST adjustments and higher income tax thresholds have already cushioned households against early tariff impacts and global uncertainty, he noted.
“This is not an opportunity to be squandered on further domestic consumption stimulus. It’s an opportunity to improve long-term competitiveness and keep enterprises focused on export diversification,” he said.
Pai emphasised scaling up Indian firms to a globally relevant size, modernising rail and logistics networks, reforming the power sector, and further easing business regulations. He viewed India’s recent trade pivot toward Europe as a crucial buffer.
The India–EU free trade agreement, along with earlier deals with the UK and EFTA, is expected to offset part of the shock from elevated US tariffs, which remain high amid stalled bilateral negotiations.
When US tariff cycles reverse, India must be positioned with competitive goods and services. Previous inflection points, including the Covid-era trade disruption, saw India miss opportunities to expand its share of global merchandise trade.
With stronger reform momentum today, India can aim to double that share, starting with gains in the EU and OECD markets before expanding in price-sensitive destinations, including the US.
Radhika Rao, senior economist at DBS Group, expects fiscal policy to play a more visible role, with general government borrowing rising in FY27. She attributes recent rupee weakness more to volatile capital flows than to current account pressures.
Expanding trade linkages and fast-tracking agreements remain central to India’s strategy, she said, with the EU pact helping mitigate tariff risks. Strong domestic fundamentals and export gains could push FY27 growth above the current 6.5% estimate.
NR Bhanumurthy, director, Madras School of Economics, said the uncertain global backdrop presents an opening for deeper domestic reforms.
He called for further market liberalisation and reforms in factor markets, especially land, to attract manufacturing into eastern and northern regions. Rationalising import duties — India’s weighted average customs duty is still well above global norms — could also boost competitiveness.
Boosting Labour Productivity
Bhanumurthy stressed productivity-enhancing policies but added that if foreign demand weakens, domestic demand may need support through incentives for employment-intensive sectors. He also urged a careful review of the Production Linked Incentive (PLI) schemes to assess their impact on profits, wages, and job creation.
SBI Research expects nominal GDP growth of 10.5-11% in FY27, enabling a fiscal deficit near 4.2% of GDP while maintaining a strong public investment push. Capital expenditure could exceed `12 lakh crore, reinforcing infrastructure creation and crowding in private investment.
At the same time, borrowing pressures are rising, with net central borrowing potentially touching `11.7 lakh crore, and states also tapping markets heavily. This underscores the need for active debt management and closer Centre-state fiscal coordination as the government aims to place debt on a declining path towards 50% of GDP by FY31.