Union Budget 2026-2027: Transforming India's Electronics Manufacturing and Export Landscape

Introduction 

The Union Budget 2026 marks a significant milestone for India's electronics manufacturing sector, introducing a comprehensive policy framework aimed at positioning the country as a global electronics manufacturing powerhouse. Through strategic fiscal incentives, customs duty rationalisation, and the expansion of Production-Linked Incentive (PLI) schemes, the government has reinforced its commitment to strengthening domestic manufacturing capabilities while boosting export competitiveness. This budget analysis explores the key measures announced, their implications for industry stakeholders, and the emerging opportunities for both domestic and international investors in India's rapidly evolving electronics ecosystem. 

India's Electronics Sector: A Growth Trajectory 

I. Manufacturing Market Overview 

India's electronics manufacturing industry has experienced a period of exceptional expansion between 2021 and 2024. The market grew from USD 71 billion in 2021 to an impressive USD 386.85 billion in 2024, reflecting the strongest multi‑year surge the sector has seen. This remarkable journey reflects the government's sustained focus on creating a robust manufacturing ecosystem through targeted policy interventions such as the PLI scheme, which has successfully attracted global original equipment manufacturers (OEMs) and contract manufacturers to establish large-scale operations in India. 

The sector's growth trajectory demonstrates India's increasing integration into global electronics value chains, with major players like Foxconn, Samsung, and Tata Group establishing significant manufacturing footprints across Tamil Nadu, Karnataka, and Gujarat. 

II. Electronics Export Performance 

India's electronics export ecosystem has demonstrated remarkable long‑term growth momentum, despite temporary fluctuations, ultimately positioning the country as one of the fastest‑expanding electronics exporters globally. Between 2021 and 2024, exports rose from USD 60.5 billion to USD 190.88 billion, delivering an impressive Compound Annual Growth Rate (CAGR) of 46.67%. This strong multi‑year expansion highlights the sector's deepening manufacturing capabilities, rising global competitiveness, and the impact of government incentives aimed at making India an export‑driven electronics hub. 

Key Budget Provisions: A Deep Dive 

1. Income Tax Exemption for Toll Manufacturing in Bonded Zones: One of the budget's most innovative provisions is the proposed amendment to Schedule IV of the Income-tax Act, aimed at incentivising domestic manufacturing of electronic goods and providing greater clarity on the taxation of capital equipment supplied by foreign companies. The amendment introduces an income‑tax exemption, available up to the tax year 2030–2031, on income earned by a foreign company from supplying capital goods, equipment, or tooling to an Indian resident contract manufacturer operating within a customs‑bonded warehouse, where such manufacturing is undertaken on behalf of the foreign company for consideration. The amendment will take effect from 1 April 2026. 

Business Implications: This provision fundamentally enhances the attractiveness of India's toll manufacturing model for global electronics Original Equipment Manufacturer (OEMs). Foreign companies can now retain ownership of expensive tooling and capital equipment deployed on Indian soil whilst receiving tax-free returns on asset utilisation for five years. This dramatically improves post-tax internal rate of return (IRR) calculations, making India's toll manufacturing proposition more competitive than comparable arrangements in Vietnam, Mexico, or other manufacturing destinations. 

Strategic Impact: The exemption is expected to accelerate the inflow of foreign manufacturing expertise and advanced production technologies, facilitating India's integration into sophisticated global electronics supply chains. Companies that already operate substantial electronics manufacturing services (EMS) facilities in India can leverage this provision to expand their bonded zone operations and deepen technology transfer. 

2. Electronics Components Manufacturing Scheme (ECMS) Expansion: Recognising that investments under the existing Electronics Components Manufacturing Scheme have already exceeded initial targets, the government has increased the scheme's outlay from INR 22,919 crore to INR 40,000 crore. This substantial 75% increase underscores the government's commitment to building a comprehensive semiconductor and electronic components ecosystem. 

Business Implications: The expanded ECMS allocation provides immediate fiscal stimulus for component manufacturers, encouraging fresh investments across the value chain from passive components (resistors, capacitors, inductors) to active components (diodes, transistors, integrated circuits) and display devices. This creates opportunities for both established players and emerging component manufacturers to scale operations and attract global tier-1 suppliers to establish India operations. 

Strategic Impact: The ECMS expansion complements the India Semiconductor Mission (ISM), creating a cohesive policy framework that addresses the entire electronics value chain. By incentivising component manufacturing alongside semiconductor fabrication, the government is systematically reducing import dependency and building domestic supply chain resilience. 

3. India Semiconductor Mission (ISM) 2.0: Building on the initial success of ISM, the Budget 2026 announces ISM 2.0, expanding the mission's scope to include support for semiconductor equipment and materials manufacturing, full-stack Indian intellectual property (IP) design, strengthened supply chains, and industry-led research and training centres for skilled workforce development. 

Business Implications: ISM 2.0 signals policy continuity and provides long-term visibility for semiconductor investors. The expanded mandate, particularly the focus on equipment, materials, and IP design, addresses critical gaps in India's semiconductor ecosystem. This creates opportunities for specialised players in semiconductor manufacturing equipment, advanced materials suppliers, and chip design houses to establish operations with government support. 

Strategic Impact: ISM 2.0 represents India's transition from an assembly-led to an IP-driven semiconductor ecosystem. By supporting domestic IP development and specialised infrastructure like testing, certification, and training facilities, the government is creating conditions for India to move up the value chain beyond mere fabrication to become a comprehensive semiconductor innovation hub. 

4. Basic Customs Duty (BCD) Exemption for Microwave Oven Components: The Budget 2026 introduces a strategic BCD exemption on specified parts used in microwave oven manufacturing, including synchronous motors (Tariff Item 8510 20), electrical converters (8543 10/8543 90), transformers (8504 31), and resistors (8536 90), effective from 1st April 202.

Business Implications: This targeted duty relief reduces the landed cost of critical components for domestic manufacturers, enhancing gross margins and making India-manufactured microwave ovens cost-competitive for both domestic consumption and exports. Companies engaged in consumer electronics assembly and other EMS providers stand to benefit immediately from reduced input costs, enabling them to scale up production capacity and explore export markets more aggressively. 

Strategic Impact: The measure exemplifies the government's shift from finished-goods import substitution to component-level manufacturing strategy, encouraging deeper localisation of bill-of-materials (BOM) and fostering upstream supply chain development. 

Regional Impact Analysis: Beneficiary States 

1. Tamil Nadu: Consolidating Manufacturing Leadership 

Tamil Nadu's robust infrastructure, proactive industrial policies, and established electronics manufacturing clusters around Chennai, Sriperumbudur, and Hosur position it as the primary beneficiary of Budget 2026 provisions. With Foxconn, Pegatron, Samsung, and Dell already operating large-scale facilities, the state's mature ecosystem enables rapid scaling in response to new incentives. The BCD relief on capital goods and PLI extensions improve capital expenditure (CapEx) economics for expanding facilities in tier-2 clusters, whilst the toll manufacturing tax exemption particularly benefits the state's concentration of contract manufacturers serving global OEMs. 

2. Gujarat: Emerging Semiconductor Hub 

Gujarat's transformation into a semiconductor manufacturing hub positions it uniquely to capitalise on ISM 2.0 and ECMS expansion. With four semiconductor plants already operational and robust automobile and industrial manufacturing base, Gujarat offers mature supply chains and logistics connectivity. The budget's BCD relaxations on capital goods combined with export incentives make Gujarat increasingly attractive for export-oriented electronics manufacturing, whilst the state's Electronics Component Manufacturing Policy 2025 provides complementary state-level support. 

3. Karnataka: Design-Led Innovation Ecosystem 

Karnataka's design-led Electronics System Design and Manufacturing (ESDM) ecosystem, accounting for approximately 40% of national electronic design output, positions it to benefit disproportionately from ISM 2.0's focus on IP design and research infrastructure. Bengaluru's concentration of global research and development (R&D) centres, chip design houses, and skilled technical talent creates natural synergies with the budget's emphasis on full-stack Indian IP development. The combination of Design-Linked Incentives, Semiconductor Mission Phase II, and R&D support encourages higher-value manufacturing and exports from Karnataka's electronics clusters in Bengaluru, Mysuru, and Hubballi-Dharwad. 

Foreign Investment Imperative 

For foreign electronics companies, Budget 2026 creates a compelling investment case built on five pillars:

• Toll-Manufacturing Tax Shield: Toll manufacturing model now has a 5year income tax exemption for any nonresident who provides capital goods, equipment or tooling to a toll manufacturer in a bonded zone engaged in manufacturing electronic goods.
• Tooling Retention Economics: Allows foreign OEMs/EMS to retain ownership of expensive tooling, keep it on Indian soil, and still receive tax‑free returns on that asset‑use for five years improving post‑tax IRR on India localisation vs third‑country manufacturing. 
• Component Ecosystem Alignment: Semiconductor supply‑chain players can align CapEx with ISM 2.0 and the enlarged Electronics Components Manufacturing Scheme outlay (INR 40,000 Crore INR 22,919 Crore), which is explicitly meant to incentivise deeper component ecosystems. 
• Policy Support Matrix: Policies include PLI schemes, Rare Earth Permanent Magnets initiative, CPSU Scheme, PM-KUSUM, grid-connected rooftop programs, ALMM list, purchase preferences for local suppliers, 

Local Manufacturing Advantage: Importers vs Domestic Manufacturers 

The budget's structure decisively favours domestic manufacturing and exports. Concessional duties for key inputs, extended PLI incentives, and targeted protections for domestic value-addition tilt the competitive landscape towards local manufacturers. 

Critically, the BCD exemption on microwave oven components applies only when used in domestic manufacturing not for finished-goods imports. This creates a clear cost arbitrage favouring local assembly over imports, encouraging multinational consumer electronics brands to establish or expand India manufacturing operations rather than continuing import-dependent business models. 

Conclusion: Strategic Opportunities Ahead 

The Union Budget 2026 represents a comprehensive, multi-layered strategy to transform India's electronics manufacturing sector. Through targeted fiscal incentives, expanded scheme allocations, and innovative provisions like the toll manufacturing tax exemption, the government has created conditions for sustained capacity expansion, supply chain localisation, and employment generation. 

For domestic manufacturers, the budget provides immediate cost relief and medium-term growth capital through expanded PLI and ECMS allocations. For foreign investors, the combination of tax incentives, duty rationalisations, and policy continuity creates compelling economics for establishing or expanding India operations. 

As India's electronics manufacturing ecosystem matures supported by simultaneous development of component manufacturing, semiconductor fabrication, and IP design capabilities the country is positioned to emerge as a critical node in global electronics supply chains, moving beyond low-value assembly to higher-value design, component manufacturing, and systems integration. 

The next five years will determine whether India successfully executes this ambitious vision, but Budget 2026 has unquestionably provided the policy framework and fiscal resources necessary for India to compete globally in electronics manufacturing.