OPINION | The strategic shade in the budget

The emphasis on macroeconomic stability must be combined with efforts

The pre-budget Economic Survey flagged a paradox. Strong macroeconomic performance - ostensibly for a large emerging market economy like India – is no longer rewarded with currency stability and capital inflows by a global system unconducive to such rewards.

The lament highlights the helplessness of policymakers.

Macroeconomic stability figures prominently among core policy goals of Budgets in India. Achieving the goal though might not bring for the country the expected returns from the external sector anymore. The anomaly is best highlighted by large outflows of foreign portfolio investment last year. Despite India posting a real GDP growth rate of close to 7%, foreign funds pulled out nearly $19 billion in 2025 from the Indian capital market.

What more does an economy growing at around 7%, with moderate inflation, declining trend in fiscal deficit, and healthy foreign exchange reserves, needs to do for assuring investors?

Move beyond macroeconomics and address the geopolitics

The answer is in stepping beyond macroeconomics and addressing the geopolitics. The emphasis on macroeconomic stability must be combined with efforts to raise local capacities in strategic sectors. While the former will address domestic concerns, the latter will convince global investors of the economy’s focus on geopolitics and safeguarding itself from exogenous disruptions in supply chains and key sourcing.

The latest Budget has walked a few steps in this direction. Three specific announcements indicate that apart from macroeconomics, economic decision-making is also framing responses to geopolitics.

Policy is responding to this need

The first is the announcement on rare earth corridors. Four rare earth corridors will be launched on India’s mining resource-rich eastern and southern coastal states: Odisha, Andhra Pradesh, Tamil Nadu and Kerala. Announcement of these corridors should be looked at in the context of the subsidies announced last year for developing domestic capacities for manufacturing rare earth magnets.

India’s dependence on China for import of rare earth magnets is well-known. The thaw in China-India relations over the last few months has ensured uninterrupted sourcing of rare earth magnets by Indian producers. However, China’s control over production of rare earth magnets keeps open the possibility of such supplies getting disrupted in future.

Just developing domestic capacities for making magnets won’t make rare earth supply chains fully resilient. The latter requires access to rare earth elements to be used as raw materials for making the magnets along with developing capacities for extracting and processing these materials. The mining corridors should develop the upstream ends of rare earth supply chains by mining raw materials and extracting and processing them for final use.

It’s surprising that India - the world’s third-largest rare-earth reserve holding country after China and Brazil and accounting for around 7% of global reserves - hadn’t thought of developing a rare-earth eco-system earlier. The corridor announcement is therefore exceptionally significant.

Harnessing supply chains

The next step is to bring in investments for running the supply chain. This is where it is essential for India to utilize its presence in a global forum like the Minerals Security Partnership, as well as the recent FTAs it has signed with the EU, UK, Australia and the UAE, for galvanizing funds and mobilizing expertise for shaping the corridors.

The second strategic announcement is launching the second phase of the Indian Semiconductor Mission (ISM 2.0). Whereas for rare earth, the corridors have followed the earlier decision to build magnets, the ISM 2.0 will incentivize domestic production of equipment and material for semiconductors, following the ISM 1.0’s focus on design and assembling of semiconductors. The strategic value of building domestic capacities in semiconductors can hardly be overstated at a time, when control over advanced and legacy chips is a fundamental flash point in the global tech tussle between major powers.

A third strategic decision is proposing a sweeping tax holiday, till 2047, for foreign businesses investing in data centres in India that will provide cloud services to global customers from India. The scope of the incentive has been expanded by providing a safe harbour of 15%, - essentially a cost margin of 15% on transfer pricing - to the resident entity providing cloud services to the foreign company providing data services to customers globally.

Long-term approach to data centers

Data centers call for deep-pocket investments. What has been offered by the Budget is truly magnanimous in scope. It underlines India’s intention to build more data centers for greater AI adoption, including in cross-border services, like digitally delivered exports. It also underscores the intention to play a big role in providing global cloud services.

It is good to see the Budget announcing decisions prioritizing strategic interests. More such decisions should come in the Budgets that follow.

(Amitendu Palit  is Senior Research Fellow and Research Lead (trade and economics) in the Institute of South Asian Studies in the National University of Singapore.)

Views are personal and do not represent the stand of this publication.