From Potential to Predictability: India’s Economic Recalibration to Trust Architecture

From Potential to Predictability: India’s Economic Recalibration to Trust Architecture

- Mukesh Butani and Shankey Agrawal¹

India today finds itself in a unique position in the global economic landscape, given the distortion in most economies driven by conflicts, slowing growth and a fragmented supply chain. India has emerged as a stable and credible growth engine for the Global South and is increasingly seen as a beacon of hope. This narrative transcends mere headline GDP figures. The result of a consistent recalibration of economic governance, where reform is now structural and cumulative rather than episodic or crisis driven. It has transformed India's image from a high-potential market to that of reliance and hope for global investors.

When Buoyant Revenues Enable Better Policymaking

Buoyant tax collections over recent years have played a critical role in shaping policy choices. Given massive allocations to capital expenditure, revenues have grown without aggressive rate hikes, suggesting that compliance is being driven more by formalisation and digitisation than by enforcement pressure. This has altered the reform conversation.

This fiscal buoyancy has given the government sufficient headroom for reforms. The Government's focus shifts from extracting incremental revenue to improving compliance and addressing glitches in the law which resulted in disputes. This dynamic approach is evident in the current approach to tax reform, which prioritises simplification, dispute reduction, and process clarity over headline measures. Over time, such predictability measures shall improve trust in institutions and eliminate the hidden costs of policy friction for businesses both for Income Tax and Customs.

Reducing Compliance Burden and Regulatory Friction

One of the most consequential yet understated reforms lie in the rationalisation of TDS and TCS provisions. Over time, the Indian withholding tax regime has become increasingly complicated, with multiplicity of rates while putting disproportionate administrative burdens on businesses and creating cash-flow inefficiencies for smaller taxpayers.

Simplifying thresholds, reducing overlap, and pruning rates has a tangible economic impact. It improves liquidity, lowers reconciliation disputes, and reduces the role of businesses as involuntary tax administrators. More importantly, it results in behavioural changes. When compliances are simpler more predictable, voluntary adherence improves. This is reform through design, not enforcement.

Adoption of AI technology for tax administration has found primary mention in budget 2026. By enabling electronic verification and issuance of deduction certificates under the Income Tax, the administration has promoted a necessary inclusion of technology for easing taxpayers’ compliances. These reforms indicate the action-centric approach in furtherance to the faceless assessment aimed at highlighting technology enabled platforms as foundational blocks.

Customs Reform and the End of Reflexive Protectionism

Customs policy offers a clear window into India’s evolving economic philosophy. While strategic self-reliance remains a long-term policy goal, the budget signals a turning point from the policy of reflexive protectionism.

On the heels of the recently signed Free Trade Agreements (‘FTAs’) with UK, Oman, New Zealand and conclusion of negotiation of the India-EU FTA, the Budget aims at improving trade facilitation measures by improving cargo handling at ports by enabling risk-based inspection, allowing faster clearance. Proposals to develop a trust-based system for clearing goods in relation to trusted supply chains is reformative. This will help in improving supply chain management and lower the time goods are held at customs ports. Further, there is a proposal to increase the binding validity for advance rulings from 3 years to 5 years. These provisions are in alignment with India’s goal to enable global competitiveness by reducing costs along with enhancing tax certainty.

Announcement to continue exemption Basic Customs Duty (‘BCD’) for multiple crucial sectors is welcomed. One of the important sectors covered is electronics manufacturing which has seen timely policy intervention for promoting manufacturing growth in India. The proposal is to continue exemption on moulds, tools and dies, which will bring down the cost of manufacturing.

Competitiveness today depends on seamless access to global supply chains, faster clearance of goods and a predictable border process. Customs reforms proposed seeks to reduces uncertainty and transaction costs to attract FDI. India appears to be increasingly comfortable with such trade-off for liberal policy and tariffs to promote its long-term objectives.

Precision Policy for Sunrise Sectors

Budget 2026 is recalibrating India as an alternative manufacturing base in a reordering global economy. Multinational firms are no longer looking for cost arbitrage. There is emphasis on predictability, speed, and policy alignment across tax, trade, and regulation. With rapid strides in growth, India has signalled a series of steps towards facilitating new-age technology by proposing fundamental revisions to Customs law. It has been proposed to allow tax carve-outs upto 2047 to cloud service providers, who use data centres located in India. Further, to promote domestic manufacturing, tax carve-outs has also been granted to non-residents, who provide capital goods under tolling arrangement to contract manufacturer in custom bonded zone.

Further, the Indian Semiconductor Mission has also been proposed to be advanced into ISM 2.0 with a view to fortify supply chains and designing full-stack Indian IPs. The increased focus on sunrise sectors such as semiconductors, electronics manufacturing, artificial intelligence, and digital infrastructure indicate a more proactive approach for bolstering growth in sunrise sectors.

Completing the Investment Puzzle with Comprehensive FEMA Review

Equally important is the proposed review of FEMA (Non-Debt Instruments) regulations. While tax policy often takes centre stage, exchange controls for facilitating foreign capital rules shape the reality of cross-border business. Complex approval processes, interpretational uncertainty, and legacy controls increase transaction costs despite competitive tax rates. A comprehensive review of FEMA would offer a great opportunity to align India’s three-decade old capital account framework to accommodate modern investment structures. The impact of the review exercise shall be awaited. For multinational groups, this could significantly improve ease of operations, movement of capital and an improved and predictable regulatory regime.

Conclusion

What emerges from the reform cycles is a long-term approach, a clear commitment to sustainment and resilience from geo-political shifts. The shift is not evident in any single policy announcement. For businesses and investors, the signal is unmistakable. Predictability is replacing discretion. Process is being valued as much as policy. Compliance is being redesigned to encourage participation rather than provoke disputes. The changes may not result in immediate headlines, but they surely lower the cost of capital, reduce risk premiums, and lengthen investment horizons. As global capital gets more selective and supply chains more strategic, these attributes will increasingly determine where value is created. India’s advantage lies not only in scale or growth potential, but in the architecture, it is building beneath them. In a volatile world, that architecture of trust and stability may prove to be India’s most decisive competitive edge.