• Sri Lanka allocation rises by one-third 
• New Delhi reshapes overseas aid priorities, cuts funding for Iran port project

The Government of India has proposed a total of 4 billion Indian Rupees in grants and loans to Sri Lanka through the 2026/27 Budget. India’s annual budget made a fresh bet on the country’s manufacturing sector as Finance Minister Nirmala Sitharaman laid out priorities for Asia’s third-biggest economy and pledged to accelerate growth amid a volatile global environment.

The budget for the next fiscal year will focus on structural reforms particularly in the manufacturing sector, building a robust financial sector and stepping up investments in cutting-edge technologies, including artificial intelligence, she said yesterday (1).

The Government led by Prime Minister Narendra Modi has been struggling to raise manufacturing from the current level of under 20 per cent of gross domestic product (GDP) to 25 per cent to generate jobs for the millions entering the nation’s workforce each year.

The Indian economy is seen growing at 7.4 per cent in the current financial year, with inflation expected at near 2 per cent. The Government’s fiscal deficit for the year is expected at 4.4 per cent of GDP.

Meanwhile, India sharply reworked its overseas development assistance in the Union Budget 2026–27, cutting aid to Bangladesh by half and making no allocation for the Chabahar port project in Iran, even as overall assistance routed through the Ministry of External Affairs (MEA) sees a marginal increase.

The allocation under ‘Aid to Countries’ has been raised to INR 56.8 billion, about 4% higher than last year’s Budget Estimates of INR 54.8 billion. However, the outlay is around INR 1 billion lower than the INR 57.8 billion provided in the Revised Estimates for 2025–26, signalling tighter fiscal prioritisation.

The most significant shift is the complete absence of funding for the Chabahar port project. India had spent INR 4 billion on the project in 2024–25 and initially allocated INR 1 billion in the 2025–26 Budget Estimates, later raising it to INR 4 billion in the Revised Estimates. The allocation for 2026–27 now stands at zero.

The decision comes despite India signing a 10-year agreement in 2024 to operate the Shahid Beheshti terminal at Chabahar, a project seen as vital for India’s access to Afghanistan and Central Asia while bypassing Pakistan.

The pause also coincides with increased external pressure on India’s engagement with Iran after United States President Donald Trump announced a 25% tariff on countries trading with Tehran, effectively weakening earlier sanctions waivers. This has added uncertainty to India’s role in the project and its broader regional connectivity plans.

Among neighbouring countries, Bangladesh sees one of the sharpest reductions, with its allocation cut from INR 1.2 billion to INR 600 million. The reduction comes amid strained bilateral relations, even as aid to most other neighbours is maintained or increased.

Bhutan remains the largest recipient of Indian aid, with its allocation rising by about 6% to INR 22.8 billion, reflecting continued support for hydropower and infrastructure projects. Nepal’s allocation increases by around 14% to INR 8 million, while Sri Lanka’s aid rises by about one-third to INR 4 billion, highlighting India’s role in Sri Lanka’s post-crisis recovery.

In the Indian Ocean region, aid to the Maldives is reduced by about 8% to INR 5.5 billion, while Mauritius receives a 10% increase to the same amount.

Aid to Afghanistan remains unchanged at INR 1.5 billion, mainly for humanitarian assistance. Myanmar’s allocation is cut by about 14% to INR 3 billion amid political instability and implementation challenges. Assistance to African countries is held steady at INR 2.25 billion, Latin America’s allocation doubles to INR 1.2 billion from a low base, and funding for Eurasian countries dips slightly to INR 38 million.

Overall, the new allocations broadly follow India’s neighbourhood-first approach, with selective changes reflecting evolving geopolitical sensitivities. The MEA’s total expenditure for 2026–27 is estimated at INR 221 billion.

Meanwhile, the Indian Government will bring down its debt-to-GDP ratio to 55.6 per cent from 56.1 per cent in the current year. Starting this year, the government has adopted debt-to-GDP as the target for fiscal policy.

To meet this debt target, the fiscal deficit is seen at 4.3 per cent in the new financial year, at par with the current year.

The Government will borrow a gross amount of INR 17.2 trillion rupees (US$187.6 billion) from the bond markets in the new year.