Union Budget 2026: Consolidating Strengths, Awaiting Bolder Reforms for India's Innovation Ecosystem

As published on DealStreetAsia.
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India's Union Budget 2026-27 represents a meaningful step forward in supporting the structural evolution of the economy, with targeted measures that reinforce macroeconomic stability whilst addressing a few long-standing concerns of the technology and innovation sectors. The Budget delivers on several critical asks from the private ecosystem, particularly around stabilising the macro-fiscal evolution in the backdrop of unstable geopolitics, lowering the cost of capital, improving ease of living and ease of doing business, and creating fiscal certainty for global infrastructure investments. 

However, despite these positives, several priorities remain unaddressed. This budget reinforces a familiar pattern in Indian policymaking: comfort in backing infrastructure for innovation, but hesitation in underwriting innovation itself. Long-term FDI incentives, ESOP and founder equity rationalisation, and safe-harbour protections for indigenous deep-tech IP creation remain conspicuously absent. These omissions matter, not only symbolically, but economically, because they constrain how much patient, risk-tolerant capital India can realistically attract for its next phase of innovation-led growth. We hope these gaps will be addressed through supplementary policy briefs over the coming financial year.

A Yuva Shakti-Inspired Budget: Consultation as Policy Precedent

It is worth acknowledging that this Budget reflects a meaningful departure in process, not just outcomes. Through the Viksit Bharat Young Leaders Dialogue 2026, Prime Minister Modi consulted directly with young innovators, entrepreneurs, and ecosystem builders, and several of the proposals announced reflect ideas that emerged from those conversations. This consultative approach matters enormously. When policymakers engage directly with practitioners rather than relying solely on bureaucratic channels, the resulting frameworks tend to be more pragmatic, implementation-ready, and aligned with ground realities.

That this Budget can legitimately be called a Yuva Shakti-inspired exercise is not merely symbolic, it represents a template for how economic policy should be formulated in a rapidly evolving innovation economy. We hope this becomes standard practice rather than an exception.

Macro-Fiscal Stability: The Foundation Holds

The Budget's most significant achievement may be what it does not do: it avoids the temptation of expansionary populism in favour of continued fiscal discipline. With nominal GDP growth projected at 7-7.5% for FY27, and gross tax collections rising from ₹33.42 lakh crore to ₹35.33 lakh crore despite larger-than-budgeted tax reliefs in the closing fiscal year, the government has demonstrated that revenue buoyancy can coexist with taxpayer relief. This fiscal consolidation is not merely an accounting exercise, it directly impacts the startup ecosystem by reducing sovereign borrowing pressure, improving bond market conditions, and creating room for private-sector investment. For a startup economy increasingly dependent on domestic institutional capital and maturing debt markets, these macro fundamentals matter enormously. 

The implicit signal is clear: India's policymakers understand that sustainable growth requires patient capital formation, not short-term stimulus. This credibility becomes particularly important as global investors assess emerging market opportunities amidst geopolitical uncertainty.

Lowering the Cost of Capital: Structural Solutions Begin to Take Shape

One of the Economic Survey's central recommendations, reducing the cost of capital through diversified financing channels and lower taxes on debt instruments, has found partial expression in this Budget. Whilst headline announcements do not include sweeping reforms to debt taxation or credit enhancement facilities, the government's continued commitment to fiscal consolidation and its allocation of ₹4,000 crore to top up the Self-Reliant India Fund signal an understanding that private equity alone cannot fuel startups. The fund, designed to infuse ₹50,000 crore into MSMEs with scale potential, addresses a critical gap: the availability of patient, long-tenure capital for companies transitioning from venture-backed startups to sustainable enterprises. 

However, the ecosystem's demand for frameworks supporting blended capital, where venture debt and alternative credit sit alongside equity, remains largely unmet. Whilst the Budget takes steps in the right direction, bolder action is needed to enable cash flow-aligned lending, sector-specific credit instruments, and stronger risk-sharing mechanisms between public and private lenders. 

IT Services: Finally, Meaningful Support for India's Export Outperformer

Perhaps the Budget's most concrete win for the technology sector lies in its comprehensive overhaul of taxation rules for IT services. By clubbing software development, IT-enabled services, knowledge process outsourcing, and contract R&D under a single category with a standardised safe harbour margin of 15.5%, the government has eliminated years of shifting interpretations and compliance burden. Equally important, the threshold for availing safe harbour has been raised from ₹300 crore to ₹2,000 crore, and the approval process will now be automated and rule-driven, extendable for five years at a stretch. 

This is a step-function change. For Indian IT services companies, including the hundreds of B2B SaaS and engineering services startups serving global clients, predictable taxation reduces friction, lowers effective tax rates, and makes India a more attractive delivery hub. The commitment to fast-track unilateral Advanced Pricing Agreements within two years further signals intent. These reforms finally acknowledge what the ecosystem has known for years: India's IT services sector is a strategic asset, and policy frameworks must reflect that reality.

Cloud Infrastructure and Global Investment: A Template For Indigenous Innovation Support

The Budget's announcement of a tax holiday till 2047 for foreign companies providing cloud services globally using Indian data centre infrastructure, coupled with a 15% safe harbour on cost for related-party data centre services, represents a watershed moment. With Google committing $15 billion to AI-ready data centres in Visakhapatnam, Amazon pledging over $35 billion by 2030, and Tata Consultancy Services investing ₹18,000 crore through its HyperVault joint venture, India is clearly positioning itself as a global cloud delivery hub. 

This policy addresses a fundamental cost arbitrage that previously favoured other geographies. By providing two decades of fiscal certainty, the government is finally competing on equal footing with Singapore, Ireland, and other jurisdictions that have long offered similar incentives. However, this should be seen as a proof-of-concept, not the end goal. 

If safe harbour mechanisms can attract global capital and capabilities to build from India, the same principles must extend to homegrown innovators taking Indian technology global. The real opportunity lies in creating a level playing field where both foreign enterprises and domestic champions can scale infrastructure and services from India with equal confidence and competitive tax treatment.

Tax Rationalisations: Progress, with Room for More

The Budget's decision to tax buybacks as capital gains for all shareholders whilst imposing an additional levy on promoters is a step towards rationalisation. This change protects minority shareholders and brings greater parity between buybacks and dividends. However, many promoters are founders of successful startups and also deserve relief in buyback taxation, particularly when capital is being returned to fund new ventures or philanthropic initiatives. 

Similarly, the extension of the startup tax holiday window to 31 March 2030 is welcome but incremental. The more substantive gaps, around ESOP taxation at grant versus exercise, founder stock being treated as income rather than capital gains, and the continued absence of incentives for sovereign wealth funds and global endowments to invest long-term FDI in India, remain unaddressed. These are not peripheral issues. ESOP taxation continues to make Indian startups less competitive in the global talent market, whilst the absence of fiscal incentives for patient foreign institutional capital limits the quantum and duration of capital available to high-growth companies. 

Continued Support for India's Rising Innovation Trajectory

India's climb to 38th position in the Global Innovation Index 2025—up from 81st in 2015 and 66th in 2019. This is a testament to sustained policy focus and private ecosystem development. The country now leads amongst lower-middle-income economies and ranks first in the Central and Southern Asia region, with cities like Bengaluru, Delhi, and Mumbai featuring amongst the world's top 50 innovation-intensive clusters. In 2024, India ranked fourth globally in trademark filings, sixth in patents, and seventh in industrial designs—indicators of genuine innovation output, not merely research or teaching activity. 

The Production Linked Incentive scheme has played a catalytic role, particularly in electronics manufacturing, attracting over ₹2 lakh crore in investments, generating ₹18.70 lakh crore in production and sales, and creating 12.60 lakh jobs. The Budget's announcement of ISM 2.0, expanding the India Semiconductor Mission to include equipment, materials, full-stack IP design, and supply chain fortification, signals continued commitment to building indigenous capabilities in strategic sectors. The increase in Electronics Components Manufacturing Scheme funding from ₹22,919 crore to ₹40,000 crore, driven by investments exceeding double the initial target, demonstrates that well-designed incentives can unlock private capital at scale. 

The Missing Piece: Indigenous Deep Tech and Procurement Reform

Here lies the Budget's most significant omission. Whilst global technology companies receive tax holidays and safe harbour provisions to build infrastructure in India, indigenous deep tech innovators, particularly in space, quantum, cybersecurity, materials, advanced manufacturing, and semiconductors, receive no equivalent fiscal support for IP development, capital-intensive R&D, or procurement risk mitigation.

India's space economy illustrates the challenge. Currently estimated at $8 billion and projected to reach $40 billion by 2030, the sector has seen over 350 startups emerge in the past five years, with more than two-thirds of historical capital flows arriving post the liberalised space policy. The government's investment of nearly $13 billion in the space sector over the past decade has contributed $60 billion to GDP through multiplier effects. Yet despite engineering talent and early-stage funding, Indian space-tech companies struggle with customer adoption, research infrastructure access, and procurement pathways. 

The same pattern repeats across deep tech verticals: Indian companies have the capability to build cutting-edge solutions, but customers, particularly government departments and large enterprises, remain reluctant to shift from legacy systems to Indian-built technologies. A structured procurement policy, combined with safe harbour incentives for indigenous deep tech IP development and capex, could immediately support dozens of Indian companies with global potential. The Budget was the ideal forum to announce these measures. Their absence suggests that policymaking still treats innovation infrastructure and service delivery differently, favouring the former whilst underweighting the latter.

Looking Ahead: From Incremental to Transformational

Budget 2026-27 is a solid, competent exercise in maintaining momentum whilst addressing specific friction points. However, to truly unlock India's innovation potential and position the country as a global hub for both infrastructure and IP creation, future policy must go further.

Specifically, three areas demand urgent attention: first, long-term incentives for sovereign funds, endowments, and foreign institutional investors to deploy patient capital in Indian startups; second, rationalisation of ESOP and founder stock taxation to global best practices, making Indian companies competitive in talent markets; and third, extension of safe harbour and tax holiday principles to indigenous deep tech companies building IP and serving global customers from India.

The startup ecosystem does not seek handouts—it seeks a level playing field, predictable rules, and recognition that innovation-driven growth requires policy frameworks as sophisticated as those offered to traditional infrastructure or manufacturing. This Budget takes important steps in that direction. The next set of reforms must complete the journey.

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