Whalesbook
India Responds to Global Trade Shocks
India's export policy is undergoing a major overhaul, shifting focus from government subsidies like MEIS and RoDTEP towards building resilience. This move is a direct reaction to a volatile global trade environment marked by escalating geopolitical tensions, stricter climate regulations, and rising protectionism. Disruptions from events like the US-Iran conflict, which has impacted vital shipping routes and global oil supply, highlight how unstable international trade can be. Such shocks render traditional subsidies less effective, emphasizing the need for India to build lasting competitiveness through structural strengths rather than relying solely on price advantages.
Budget Prioritizes Infrastructure and Credit
The Budget for 2026-27 outlines this strategic pivot by allocating significant funds to export credit and trade infrastructure, rather than direct financial aid. The plan includes a ₹7,295 crore export credit package, comprising ₹5,181 crore for interest subvention and ₹2,114 crore for collateral support, aimed at helping Micro, Small, and Medium Enterprises (MSMEs) secure financing. Alongside this, a substantial ₹12.2 lakh crore public capital expenditure program targets key logistics routes like waterways, freight corridors, and coastal shipping to lower operational costs. Customs reforms are also underway, extending duty deferment periods and removing caps on courier exports. These efforts are already showing results, with India's logistics costs reportedly falling to 7.97% of GDP for FY 2023-24, a considerable improvement from earlier estimates and now closer to global benchmarks.
EU's CBAM Poses New Compliance Hurdles
Beyond infrastructure, Indian exporters face new global regulatory demands, notably the European Union's Carbon Border Adjustment Mechanism (CBAM). Scheduled for its definitive phase in 2026, CBAM will apply carbon pricing to imports, affecting Indian businesses in sectors such as steel, cement, and aluminum. For Indian MSMEs, CBAM presents complex challenges, including difficulties in tracking emissions data, a lack of standardized carbon accounting, and significant verification hurdles. The country's reliance on a fossil fuel-heavy energy grid further complicates matters compared to EU producers. While the budget shifts away from schemes like the Interest Equalization Scheme, focusing on export insurance and trade defense, and introduces a 2.75% interest subvention for MSMEs, adapting to stringent carbon compliance will require substantial investment and technical upgrades.
Challenges and Risks Ahead
This ambitious structural transition faces considerable execution risks. For instance, the goal to equip 50 major export clusters with accredited carbon accounting facilities within three years echoes past infrastructure initiatives that faced project readiness delays. The complexity and cost associated with meeting CBAM requirements could also prove too high for many MSMEs. With only about 61% of MSMEs currently holding export credit insurance policies, ensuring widespread adoption of advanced compliance measures remains uncertain, potentially widening the gap between large corporations and smaller firms. Furthermore, ongoing geopolitical instability, as seen with the US-Iran conflict's impact on global shipping, illustrates how external fragilities can undermine domestic policy efforts. India's late engagement with international frameworks like CBAM may also limit its influence over critical rules and transition timelines.
Path Forward: Measuring Success
The success of India's strategic pivot from subsidies to systemic cost reduction will ultimately depend on measurable outcomes. This includes not only efficient infrastructure development and improved export credit access but also the nation's ability to build robust compliance systems and actively participate in global regulatory discussions. The budget lays the groundwork for a structural transition, but its long-term impact will be judged by tangible improvements in export competitiveness, reduced structural costs, and sustained adaptation to the evolving demands of international trade.