India's Union Budget for 2025, set to be presented on February 1, is expected to unveil a comprehensive strategy focused on enhancing export competitiveness and manufacturing quality. Finance Minister Nirmala Sitharaman's announcements will likely center on schemes enabling export diversification, improving market access, and elevating the quality of goods manufactured in India, according to government sources.

Strategic Focus on Global Integration

The government is finalizing policies to further integrate the Indian manufacturing sector with global supply chains while reducing import dependence on commodities, select products, and capital goods. The budget will emphasize reforms and measures to improve ease of doing business and bolster industry competitiveness. This approach aims to address risks from global uncertainty by improving manufacturing quality to help Indian products excel across multiple markets.

Trade Performance Amid Global Challenges

India has demonstrated resilience despite global trade shifts toward protectionism. The country's trade performance during April-December shows:

Exports increased despite 50% tariffs imposed by the US, India's largest trading partner, demonstrating the economy's adaptability to challenging global conditions.

Manufacturing Standards and Quality Enhancement

The budget may propose deeper alignment of Indian manufacturing standards with international norms, coupled with financial support for testing, certification, and compliance, especially for micro, small and medium enterprises (MSMEs). Key focus areas include:

• Expanding domestic testing infrastructure
• Faster accreditation of laboratories
• Incentives for firms adopting global quality benchmarks
• Priority sectors: engineering goods, electronics, textiles, toys, and consumer products

The government has already announced close to 100 new voluntary quality control standards as a precursor to the budget measures.

Strategic Import Substitution

The budget may address China's potential threat to supply structurally important rare-earth metals by creating a focused list of critical goods where domestic capacity remains strategically important. Priority areas include:

• Electronic components, semiconductors, and display panels
• Capital goods such as precision machinery and industrial robots
• Clean energy inputs including solar wafers, cells, and battery storage systems
• Pharmaceutical bulk drugs and key chemical intermediates
• Select defense and aerospace components

Measures may include targeted capital subsidies, lower import duties on raw materials, and long-term procurement commitments to encourage domestic manufacturing.

Export Competitiveness Initiatives

The budget is expected to announce export-linked incentives for companies achieving scale thresholds and support for cluster-based manufacturing to reduce logistics and input costs. Additional measures may include:

• Funding for design, branding, and marketing of Indian products overseas
• Focus on labor-intensive sectors: textiles, footwear, furniture, and food processing
• Strengthening trade finance and expanding export credit insurance
• Increased funding for market access initiatives

The government may also incentivize multinational firms to source higher shares of inputs from India while easing customs procedures for intermediate goods and creating plug-and-play manufacturing zones linked to ports and logistics hubs. These initiatives aim to encourage joint ventures, technology partnerships, and supplier development programs that will help Indian firms, particularly MSMEs, become reliable vendors to global manufacturers.

The Union Budget 2025 presents a strategic shift in capital expenditure allocation, moving away from broad-based spending to targeted sectoral investments. After experiencing significant momentum in the first half of FY26, the capex cycle has normalised, prompting investors to focus on specific policy signals and sectoral priorities. The government's commitment to fiscal discipline limits scope for expansive spending, creating a selective investment environment.

Defence Sector Leads Capex Growth

Defence emerges as the standout performer in the upcoming budget allocation. The sector benefits from substantial emergency procurement and sustained indigenisation initiatives that strengthen India's strategic capabilities.

Motilal Oswal expects defence spending to jump significantly, driven by the government's focus on strategic resilience and self-reliance. Allied industries including shipbuilding, electronics, and critical minerals are positioned to benefit from the indigenisation wave as policy emphasis shifts toward domestic manufacturing capabilities.

Railways Allocation Shows Mixed Outlook

The railways sector faces a differentiated approach with specific segments receiving priority treatment. Safety infrastructure, signalling systems, and rolling stock remain key focus areas, reflecting the government's commitment to operational efficiency and passenger safety. However, broader rail segments that constituted 47% of FY26's capex allocation are expected to see more restrained growth.

BofA Securities economists Rahul Bajoria and Smriti Mehra indicate that allocation for roads, remaining railway sub-segments, and housing could remain subdued in the upcoming budget cycle.

Overall Capex Trajectory and Fiscal Framework

Total capital expenditure growth is projected to align with nominal GDP expansion, showing significant moderation from previous periods. The spending pattern reflects a normalisation after the front-loaded approach adopted in early FY26.

Bajoria and Mehra noted that capital spending has normalised over recent months, tracking 28% year-over-year growth on a financial year-to-date basis. They expect capex to slightly exceed budget numbers primarily due to additional defence spending.

Sectoral Winners and Investment Focus

Motilal Oswal identifies several sectors positioned for higher allocations beyond defence. Infrastructure-linked manufacturing, pharmaceuticals, power, nuclear energy, electronics, and critical minerals are expected to receive enhanced funding. Trade tariff-affected labour-intensive sectors may also see supportive measures.

The approach represents a strategic pivot from the broad-based capex rally of 2022-24, when government spending provided widespread sectoral benefits. Revenue expenditure is expected to remain tightly managed, with limited growth in subsidies and non-essential spending, maintaining the government's fiscal discipline approach.

Market Implications and Outlook

The selective capex approach creates a differentiated investment landscape where strategically aligned sectors receive priority funding. Defence contractors, railway safety equipment manufacturers, and allied industries stand to benefit most from the targeted allocation strategy. The government's focus on fiscal consolidation while maintaining strategic investments reflects a balanced approach to economic management and national security priorities.