India’s central government budget for fiscal year 2026-27, known as the Union Budget, was presented by Finance Minister Nirmala Sitharaman to Parliament on February 1, 2026. It marks Prime Minister Narendra Modi’s latest effort to steer India toward technological and economic self-reliance.
Coming amid global shifts in supply chains and escalating geopolitical tensions, this budget appears as a frantic bid to board a bus that India has missed during Modi’s over a decade in power. Past budgets under his tenure prioritized populist fiscal measures, infrastructure and fiscal prudence at the core but largely overlooked the critical sectors defining today’s global economy: rare-earth minerals and magnets, artificial intelligence (AI), semiconductors and green energy transitions.
These critical areas are not just economic drivers; they shape international politics, from the US-China trade wars to Europe’s and India’s own pushes for “strategic autonomy.” By failing to invest early and aggressively, India squandered opportunities to become a high-tech manufacturing hub using its low-cost human resources, five times cheaper than China’s and 25 times cheaper than America’s. This has left India trailing far behind sector leaders like China.
These new announcements, while welcomed in India, feel like too little, too late—a patch on more than a decade of neglect. Examining the budget reveals a glaring mismatch between the Modi government’s rhetoric and reality. Modi’s governments have touted “Atmanirbhar Bharat” (self-reliant India) since 2020 after the deadly clash with the Chinese People’s Liberation Army in Galwan Valley, yet the nation remains highly import-dependent in these pivotal sectors.
Rare earth materials and magnets, essential for electric vehicles, wind turbines and the defense industry, exemplify this failure. China controls over 90% of global rare earth processing and 93% of magnet production, using this dominance to impose export controls that disrupted Indian industries in 2025.
Why did India miss this bus? Successive budgets ignored domestic exploration and processing, even though India holds significant reserves such as the lithium in Kashmir. Instead, policies focused on short-term gains such as farm subsidies and tax cuts, allowing China to consolidate its lead through state-led investments unhindered by environmental or market constraints.
India’s progress in AI remains limited. While China integrates AI across sectors, India faces challenges such as talent migration and insufficient research and development funding.
Semiconductors, the backbone of modern high-tech manufacturing and the defense industry, saw India approve just a handful of fabs by 2025, far short of the scale needed to rival Taiwan or China.
What about green energy transitions? Though India made significant progress, achieving 50% of non-fossil fuel capacity in 2025, ahead of schedule, this masks reliance on Chinese solar panels and batteries, undermining efforts to build a domestic ecosystem. This is only a screwdriver achievement in which Indian laborers installed Chinese solar panels and batteries.
These misses aren’t mere oversights; they’re systemic. Global politics and economy now revolve around supply chain resilience, with rare earths and semiconductors as weapons in trade and technology wars. The US has poured billions into domestic production under the CHIPS Act, while Europe is building alliances like Pax Silica to diversify away from China.
India’s limited presence in these sectors has hindered its emergence as a manufacturing leader. Manufacturing’s share of GDP remains below 20%, short of the 25% target, while youth unemployment is high, job creation is slow and key economic indicators such as housing and vehicle sales have declined over the past five years.
The budget’s capex-led growth mantra ignores how high-tech sectors could generate millions of skilled jobs, instead perpetuating a low-value economy vulnerable to global economic and geopolitical shocks. Reviewing the 2026-27 budget, some new announcements target these gaps, but they’re incremental at best. The revised estimate of total expenditure is 496 billion rupees, of which capital expenditure is about 110 billion.
In rare earths, dedicated corridors in Tamil Nadu, Kerala, Andhra Pradesh and Odisha aim to scale mining and processing, building on the 72.8 billion rupees scheme approved in November 2025.
The budget also introduced customs exemptions on capital goods for critical minerals processing to reduce import reliance. However, this indicates a lack of domestic capital goods manufacturing capacity to support mining and processing.
For AI, Bharat-VISTAAR, a multilingual AI tool for agriculture, and support for the AI Mission stand out, alongside a High-Powered Committee for education-to-employment transitions incorporating AI skills.
Semiconductors get a boost with the second India Semiconductor Mission (ISM 2.0), allocating $436 million for equipment and IP design.
Green energy initiatives include extended incentives for lithium-ion cell manufacturing, exemptions for 17 drugs, and the Biopharma Shakti program with 100 billion rupees allocated for biologics. Data centers and strategic sectors such as textiles also receive support. However, these measures lack the scale required for transformation. There is no large-scale R&D fund comparable to China’s, nor are there significant talent-retention programs. The budget instead prioritizes fiscal prudence, reducing the deficit to 4.3%.
India’s core challenges include persistent shortages in public investment, knowledge, skills and talent. In parts of 2025, FDI inflows turned negative, with net FDI declining by 96.5% as foreign firms exited due to regulatory hurdles and labor disputes.
According to the Economic Survey 2026, India’s Production Linked Incentive (PLI) schemes attracted $22.2 billion by 2025, which remains insufficient for the semiconductor sector’s needs. Knowledge gaps persist, with India ranking low in patent registrations for AI and rare-earth technologies. Skills shortages are significant, particularly in the animation, visual effects, gaming, and comics (AVGC) sector, which will require 2 million professionals by 2030. Upskilling initiatives remain limited, and many engineers seek opportunities abroad due to a lack of domestic prospects.
India has not fully capitalized on the relocation of US and European firms from China. Despite the “China Plus One” strategy, Vietnam attracted a greater share of FDI, with India’s share at 0.7% of GDP compared to Vietnam’s 4.2%.
Several structural barriers contribute to this outcome, including complex entry processes, compliance disputes and cultural challenges, which result in 40% of foreign firms exiting within five years. In 2025, China restricted the export of engineers and equipment to India, while India’s visa delays and regulatory actions against Chinese firms further discouraged investment. Major companies such as General Motors, Ford Motor Company, and Harley-Davidson exited after significant investments, citing market misalignment. Labor disputes, including strikes at Apple suppliers such as Foxconn, also highlight ongoing challenges.
Inconsistent policy enforcement and frequent regulatory changes have eroded investor confidence, leading to perceptions of India as a challenging environment for foreign companies.
China established its lead in the 1980s, now accounting for 60% of rare-earth mining and 91% of refining, and has implemented export controls that have increased prices for key elements by 40%. In 2025, India imported $221 million in magnets, highlighting its dependence on China. Bridging this gap will require decades, as China’s export control regulations further restrict access. In AI and semiconductors, China’s state subsidies significantly exceed India’s efforts amid rising global demand.
In green energy, China exported 58,000 tons of magnets in 2024, supporting millions of electric vehicles worldwide, while India continues to address foundational challenges. China’s dominance provides significant geopolitical leverage. While the recent budget is a positive step, without substantial reforms, India risks falling further behind in the global competition.
Bhim Bhurtel is on X at @BhimBhurtel