MC EXCLUSIVE Tailwinds for aviation sector: Budget 2026 likely to offer incentives to small aircraft makers

The idea is to focus on building genuine manufacturing capability, including design and key components, for regional aviation needs

Budget 2026 will likely announce an incentive scheme to promote manufacturing of small aircraft, as the government steps up efforts to build a self-reliant civil aviation manufacturing ecosystem, government sources told Moneycontrol.

Small aircraft usually refer to planes with fewer than 20 seats, deployed primarily on short-haul and regional routes.

“The scheme is being prepared for Budget 2026 and is intended to support indigenous manufacturing of small aircraft over a five-year period, with a focus on design, components and assembly within India,” one of the sources cited above said.

The proposed scheme will focus on encouraging aircraft design, component manufacturing and final assembly within India.

The initiative is aimed at creating end-to-end domestic capability for small aircraft that can be deployed on regional and short-haul routes, particularly under the government’s regional air connectivity programme.

“The idea is to focus on building genuine manufacturing capability, including design and key components, for regional aviation needs,” the source said.

Finance Minister Nirmala Sitharaman is expected to present the Budget for the financial year 2026-27 in early February.

Aligning UDAN connectivity with domestic manufacturing

Sources said policymakers see a structural gap in the aviation sector, where regional connectivity under Modified UDAN has grown but aircraft manufacturing continues to depend largely on imports, a gap the proposed scheme seeks to address.

Indian airlines operating regional routes rely largely on leased aircraft from foreign manufacturers and lessors, which raises costs and limits availability.

Sources said domestic manufacturing of small aircraft can help reduce this dependence, improve aircraft availability and ease cost pressures for regional operators.

“The government wants regional connectivity and manufacturing to reinforce each other. If regional routes expand, the broader economic benefits should also expand,” the source said.

Institutional framework under discussion

While the broad contours of the scheme are taking shape, sources said discussions are also underway for an institutional mechanism to anchor the programme. This could be in the form of a programme body or a special purpose vehicle that would coordinate policy support, industry participation and technology development.

“There is a recognition that aircraft manufacturing requires long-term coordination across ministries, regulators and industry. A programme-level authority or SPV would help ensure continuity and execution over multiple years,” the source said, adding the structure is still being discussed.

Sources clarified that this could be a programme-management framework to drive implementation of the manufacturing push.

According to sources, the finance ministry has approved the scheme in principle, clearing the way for it to be taken up as part of the Budget 2026 announcements, while operational details are being worked out.

India does not have a dedicated central scheme focused on civil aircraft manufacturing, though incentives exist for drones, maintenance, repair and overhaul activities.

Industry stakeholders have argued that the absence of a targeted policy framework has held back the development of a domestic civil aircraft manufacturing ecosystem.

“The scheme under discussion attempts to address a long-standing gap. Aircraft manufacturing has different risk profiles and gestation periods compared with other manufacturing sectors, and needs tailored support,” the source said.

Sources indicated that further details, including the scale of incentives and eligibility criteria, could evolve closer to the Budget.