Union Budget FY 2026-27: Strengthening Capital Goods Sector

The Union Budget 2026–27 places renewed emphasis on the capital goods sector as a core pillar of India’s investment-led growth strategy.

Capital Goods

• Meaning: Capital goods include plant, machinery, equipment and accessories required for manufacturing, production or service delivery, including those used for replacement, modernisation, technological upgradation and expansion.
• Sectoral Usage: Capital goods are utilised across manufacturing, mining, agriculture, infrastructure, energy, and services, making the sector foundational to the entire economy.

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Role of Capital Goods in Industrial Growth

• Multiplier effect:
  • Growth in the capital goods sector has a high forward and backward linkage effect, as it supplies machinery and equipment to industries such as automobiles, textiles, power, cement, steel, and infrastructure.
  • When firms invest in machines and equipment, it triggers secondary demand for raw materials (steel, electronics), logistics, maintenance services, and skilled manpower. 
• Enhanced productivity: 
  • Adoption of advanced machinery, robotics, and CNC tools reduces production time, wastage, and defect rates.
  • Automation improves precision, standardisation, and scale, allowing firms to meet global quality benchmarks (ISO, BIS, export standards).
• Technological catalyst: 
  • The capital goods sector acts as a technology diffusion channel, transferring innovation across industries.
  • It enables the transition to Industry 4.0, including: Smart factories, Internet of Things (IoT) enabled machines, Data-driven predictive maintenance.
  • Indigenous capital goods development strengthens domestic R&D ecosystems, reducing dependence on imported proprietary technologies.
• Employment generation: 
  • Capital goods industries are skill-intensive, generating demand for: Engineers, Tool designers, Technicians, Automation and mechatronics specialists.
  • Tool rooms, machine tool clusters, and equipment manufacturing support MSME employment, apprenticeships, and technical skilling aligned with Skill India.
• Strategic independence: 
  • A strong domestic capital goods base reduces reliance on imported high-end machinery, especially from a few supplier countries.
  • This enhances supply chain resilience for: Infrastructure projects, Defence production, Energy transition (renewables, EVs, batteries)
  • Strategic autonomy in capital goods lowers exposure to global disruptions, export controls, and currency volatility, strengthening long-term economic security

Trade and Production Trends

• IIP Trends: Capital goods under  Index of Industrial Production grew 8.1% YoY in December 2025.
• Exports: Capital goods exports increased to ₹33,356 crore in FY25 from ₹31,621 crore in FY24, reflecting stronger domestic capacity.
• Production: Production rose to ₹2,05,194 crore in FY25, up from ₹1,85,858 crore in the previous year.
• Imports: Capital goods imports expanded by 6.6% in Q1 FY26 and 9.2% in Q2 FY26, indicating robust investment demand and reliance on advanced machinery.
• Rising Government Capex: Government capital expenditure increased nearly 4.2 times from FY18 to ₹11.21 lakh crore in FY26 (BE)

Key Capital Goods Interventions in Union Budget 2026–27

• Public Capital Expenditure:  Public capex proposed to rise by about 9% to ₹12.2 lakh crore in FY27, reinforcing infrastructure creation and crowding-in private investment.
• Hi-Tech Tool Rooms: Proposed establishment of two Hi-Tech Tool Rooms by CPSEs, functioning as digitally enabled and automated service bureaus for design, testing and precision manufacturing.
• CIE Scheme: A Scheme for Enhancement of Construction and Infrastructure Equipment aims to strengthen domestic manufacturing of advanced equipment such as lifts, firefighting systems, tunnel-boring machines, and high-altitude construction equipment.
• Container Manufacturing: A new Scheme for Container Manufacturing with a proposed outlay of ₹10,000 crore over five years to create a globally competitive container manufacturing ecosystem.
• Tax Incentives: A five-year income tax exemption is proposed for non-resident entities supplying capital goods, equipment or tooling to toll manufacturers operating in bonded zones.
• Duty exemptions
• • Basic customs duty exemption on capital goods for manufacturing Lithium-ion cells is extended to battery energy storage systems.
  • Capital goods imported for processing critical minerals are proposed to be exempt from basic customs duty to strengthen domestic value chains.

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Recent Policy Support for Capital Goods Sector

• Production Linked Incentive (PLI) Schemes: PLI schemes promote scale, technology adoption, and global competitiveness, with over ₹2 lakh crore investment realised and ₹18.7 lakh crore incremental production.
• PLI-Advanced Chemistry Cell (ACC) Scheme aims at localising battery manufacturing, with 40 GWh capacity awarded thus, strengthening India’s EV ecosystem
• Competitiveness Enhancement Scheme: Phase II of the Capital Goods Competitiveness Scheme supports Centres of Excellence, testing infrastructure, and R&D collaboration, with ₹714 crore government support.
  • Technologies developed have found markets in France, Belgium and Qatar, indicating rising global competitiveness.

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