Leveraging public investment for manufacturing & exports
As India prepares for the Union Budget 2026-27, the moment offers an opportunity to recalibrate public spending in ways that not only sustain growth but also crowd in private investment, deepen reforms, and strengthen India’s global competitiveness. A strategic Budget-anchored in capital expenditure, export performance, state-level reforms, MSME revitalisation, and digital public infrastructure-can serve as a powerful catalyst for the next phase of economic transformation. A first and critical priority is to sustain and diversify the momentum in capital expenditure, especially for manufacturing. While central capex has been instrumental in supporting growth, its composition now matters as much as its scale.
The Budget can reorient a portion of public investment towards production-complementary assets such as cluster-level common facilities, industrial parks, dedicated logistics hubs, manufacturing technology centres, and skill infrastructure. Such investments can directly address the recent decline in capital efficiency in manufacturing, reflected in worsening ICOR figures, and unlock far larger volumes of private investment. Centrally funded capex provisions aimed at productivity-enhancing infrastructure can help manufacturing firms lower costs, adopt new technologies, and integrate better with supply chains-domestic and global alike.
Second, export diversification requires a fresh policy instrument. The creation of an Export-Linked Incentive (ExLI) scheme, built around an outcome-based and WTO-compliant ‘Export Performance Credit’ (EPC) system, can be a game-changer. Unlike sector-specific or firm-specific subsidies, ExLI should be firm-neutral and sector-agnostic, rewarding performance rather than lobbying power.
Eligibility can be extended to firms with three to five years of export experience that are registered on a unified export digital platform. Credits should be linked to incremental export value over a sustained period, entry into new and non-traditional markets, and a shift towards higher value-added products. Instead of cash payouts, EPCs can be issued as capped digital scrips, redeemable only for technology upgradation, productivity investments, branding, and international market development. Linked with trade finance support under initiatives like ‘Niryat Protsahan’, this system can deliver far better results than fragmented refund and guarantee schemes, while avoiding balance-sheet inflation. Third, the Budget can play a decisive role in pushing economic reforms down to the states. The existing framework of interest-free, 50-year capital investment loans to states can be sharpened by earmarking a portion-say one-third-for reform-oriented projects.
These could include digitisation of land records, single-window clearance systems, improvements in contract enforcement, and strengthening municipal property tax frameworks. In line with the 15th Finance Commission’s recommendations, the Budget can also institutionalise a ‘State Reform Performance Grant’, providing untied grants linked to measurable improvements in ease of doing business, power sector reforms, and service delivery. Rewarding both frontrunners and fast improvers can create competitive federalism, encouraging laggard states to catch up. Extending performance-linked grants to cities and villages through municipal corporations and panchayats would further deepen reform incentives at the grassroots.
Fourth, while the formalisation and support of MSMEs-particularly labour-intensive and export-oriented ones-will likely remain a focus, rejuvenation requires sharper targeting. Three pillars are essential: access to finance, cluster-based development, and policy predictability.
Expanding credit availability and interest subvention, especially for export credit, can ease financing constraints. Cluster-level interventions can reduce logistics costs, improve access to shared services, and enhance competitiveness. Equally important is predictability in duties, rebates, and incentive structures. A credible commitment to multi-year stability in these regimes can significantly reduce uncertainty for MSMEs, enabling them to plan, invest, and scale with confidence.
Finally, the time is ripe to establish a Public Digital Infrastructure Fund to support innovation and exports in the digital domain. A sovereign but multi-partner fund-backed by multilateral and private collaborators-can be dedicated to scaling, maintaining, and globally deploying India’s open-source Digital Public Goods. With an initial corpus of around `10,000 crore, the fund can support R&D, cybersecurity, and capacity building for DPI modules, while also creating a dedicated export finance window to help Indian digital solutions reach global markets.
Together, these budgetary measures can reinforce each other-using public investment not merely as expenditure, but as a strategic lever to drive productivity, exports, reforms, and long-term growth.
The writer is President, Chintan Research Foundation; views are personal
