Union Budget 2026: Strategic Reforms and Industry Implications

The premier, full-service Indian law firm, Lakshmikumaran & Sridharan Attorneys, along with its experts L. Badri Narayanan and Paritosh Chauhan, have analysed the 2026 Budget, which introduces significant changes that will impact various sectors and industries.

Attributed to L. Badri Narayanan, Executive Partner, Lakshmikumaran & Sridharan Attorneys,

This is an interesting budget for what it has done and what it has not. It is really a ‘clean up’ budget to set the stage for more transformative budgets in the future. A few interesting observations. IT Sector and Electronics Manufacturing are clear beneficiaries of this Budget. We have heard the FM on safe harbour for IT and promoting unilateral APAs. From Electronic Manufacturing perspective, two topics that we have been representing to the Ministry have been accepted – one of them being 2% safe harbour for goods belonging to NR when stored in India and exemption to NR for supply of Capital Goods for Tolling in Bonded Zones. The industry has been seeking certainty in these areas and LKS had made representations on their behalf. Glad to see that some of the suggestions have been accepted and have seen the light of the day. The proposed changes will provide impetus to the sector.

The ‘quieter’ aspects of a budget are rarely appreciated – reducing litigation, decriminalisation of offences, reduction in pre-deposits for stay, extensions of timelines, etc. In my experience, these tend to have larger impact in the overall scheme of things rather than tax breaks and incentives. Overall, I think it is a good budget and something to look forward to in the future years.

Attributed to Paritosh Chauhan, Partner, Lakshmikumaran & Sridharan Attorneys:

On ISM 2.0

ISM 2.0 is explicitly framed to move beyond fabs into:

• (a) semiconductor equipment and materials,
• (b) full-stack Indian IP/design, and
• (c) supply-chain resilience.

This (new) ecosystem (when it comes into play) will be supported by industry-led research/training centres. This means that the upstream stack, i.e., tools, chemicals, IPR and any other materials used in manufacture are all now in scope of ISM 2.0.

This means that to secure benefits, companies will have to move up the value chain and procure equipment, materials and design from Indian tool vendors, material suppliers, and design partners. Each of these relationships will need:

• Procurement terms which carefully account for risk allocation (both commercial and regulatory) in view of the fact that the intermediate components are now being procured from Indian vendors (as against import reliance). For example, the risk under consumer protection laws needs to be addressed to attribute/apportion liability correctly.
• Technical standards will need to be specific and annexed to the contracts. Compliance with QCOs and other local regulatory requirements should be in addition to the commercially agreed technical needs standards and should also be adequately addressed.
• Licensing terms (in JVs or tech licenses) will need to be carefully defined, to ensure clear limits on use as well as careful segregation of background and foreground IPR. This aspect is often overlooked but is now of paramount importance considering any breach (including third-party breach, which can often exceed contract value), as well as enforcement action will be in India. “Full-stack Indian IP” and “industry-led R&D” means process recipes, designs, and software flows will be funded and co-developed in India. Without adequate provisions for IP-assignment/licensing, there is a risk of fragmented ownership between the sponsor, the tool vendor, the materials supplier, and the design partner – all of which are difficult to monetise or defend.

From a contracts and compliance perspective, ISM 2.0 isn’t factory-only policy. It shifts attention to the licensing and standards that apply to upstream equipment and materials, and it makes technology and IP terms central to every supplier engagement. Companies should ensure IP assignment and background-IP licensing terms are carefully negotiated and closed at bid-stage.

On increased outlay of INR 40,000 crore for Electronics Components Manufacturing Scheme (ECMS)

Similar to the impact of ISM 2.0, if more electronic components are sourced locally to capture incentives (or simply because local capacity now exists and it is cheaper), companies will contract with a larger set of domestic component vendors. This means increased quality, warranty, and liability exposure for OEMs and system integrators, often disproportionate to individual component or contract values. Onboarding vendors responsibly requires (as a minimum):

• Documented vendor qualification (technical capability, reliability, compliance),
• Conformance testing, and ongoing audits,
• Milestone based checks and payment terms which are subject to these checks.

A generic template will not work – better framework agreements and procurement contracts with careful risk allocation will be required.

On CDSCO reforms

A strengthened CDSCO is likely to result in improved approval timelines through a dedicated scientific review cadre and specialist expert; better guidance on dossiers (i.e., the structured set of documents that a sponsor / applicant submits to a regulator to demonstrate that a drug product is quality-assured, safe, and effective for its proposed use). This will help in-house regulatory teams plan for authorisations with more predictability.

Budget 2026 proposes to strengthen the CDSCO through a dedicated scientific review cadre and specialist expertise, with the stated objective of aligning approval timelines with global standards. While no statutory timelines have been introduced, this is expected to improve review quality, consistency, and the clarity of regulatory expectations, including around dossier requirements. In turn, this should enhance predictability for in-house regulatory teams in planning product authorisations, subject to effective implementation.

On rare earth corridors

Dedicated rare earth corridors have been announced for Odisha, Kerala, Andhra Pradesh, and Tamil Nadu. These announcements constitute policy intent only and do not, by themselves, create statutory rights, concessions, or enforceable obligations. Implementation will require subsequent legislative, regulatory, or executive action. Notwithstanding the absence of immediate legal effect, bidders may reasonably expect future auctions and concession documents to be updated to reflect corridor-linked policy measures once formally notified.

On review of FEMA/NDI Rules

It was announced that a comprehensive review of the Foreign Exchange Management (Non-debt Instruments) Rules will be undertaken to create a more contemporary, user-friendly framework for foreign investments. This signals an intent to rationalise and modernise the delegated regulatory framework governing FDI. The emphasis on user-friendliness, reduced compliance, and deregulation suggests a likely focus on simplification, procedural efficiency, and clarity, subject to implementation through subsequent notifications.

Conclusion

Overall, the 2026 Budget reflects a strategic shift toward structural reforms, long-term policy stability, and sector-specific growth enablement. While immediate incentives are targeted at key industries such as IT and electronics manufacturing, the broader focus on reducing litigation, strengthening regulatory frameworks, and modernising investment rules signals a forward-looking approach. The announcements under ISM 2.0, ECMS, CDSCO reforms, and FEMA review collectively underline the government’s intent to build resilient domestic ecosystems and enhance ease of doing business. Effective implementation will be critical, but the policy direction clearly sets a strong foundation for sustainable economic and industrial growth in the years ahead.

Click to know more about Lakshmikumaran & Sridharan Attorneys

If you have a news or deal publication or would like to collaborate on content, columns, or article publications, connect with the Legal Era News Network Team and email us at info@legalera.in or call us on +91 8879634922.