Trump tariff shadow: Budget addresses US demands, backs vulnerable sectors

For the domestic sector, Sitharaman announced a host of measures, particularly in the textile sector, to increase productivity, including capital support for textile machinery in clusters and a targeted scheme to boost the availability of input items — a longstanding challenge.

US demand for tax break for data centres

As part of the bilateral trade agreement negotiations, the US had sought greater market access for its companies looking to establish their data centres in India. The demands are understood to have included tax breaks, affordable access to resources like land, energy and water, and duty exemptions on some imports. With the announcement of a tax holiday until 2047 to foreign companies for setting up data centres in the country, the government has acted on one of the US’s key demands.

However, the tax break comes with some riders: the companies would need to provide services to Indian customers through an Indian re-seller entity.

Several US companies have announced massive investments in setting up data centres in India to fuel artificial intelligence’s hunger for such infrastructure. Last month, Union IT Minister Ashwini Vaishnaw said that private investments in India’s AI infrastructure could double from last year’s $70 billion by the end of the ongoing financial year (FY26).

US demands in aviation, nuclear & data services

With the passage of the Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India (SHANTI) Act, 2025, and opening the sector for private players to enter the operations side of the tightly-governed nuclear power sector, the government had already addressed a key US demand. On Sunday, the Budget proposed zero customs duty on nuclear-generation equipment, absorber rods and project imports for all registered nuclear plants until 2035, signalling long-term market access. In the aviation sector too, India has eliminated duties on aircraft components and Maintenance, Repair and Operations (MRO) inputs, benefiting US aerospace firms and engine and maintenance suppliers.

Concession for units in Special Economic Zones

Aimed at preventing job losses in the Special Economic Zones (SEZs), Sitharaman announced “a special one-time” measure to facilitate sales by eligible manufacturing units in SEZs to the Domestic Tariff Area (DTA) at concessional duty rates.

“To address the concerns arising about utilisation of capacities by manufacturing units in the Special Economic Zones due to global trade disruptions, I propose, as a special one-time measure, to facilitate sales by eligible manufacturing units in SEZs to the DTA at concessional rates of duty. The quantity of such sales will be limited to a prescribed proportion of their exports. Necessary regulatory changes will be undertaken to operationalise these measures while ensuring a level playing field for the units working in the DTA,” Sitharaman said.

SEZs are zones which receive a simplified system of official clearances and procedures, and other duty benefits aimed at spurring investments and manufacturing.

The Budget announcement comes amid distress calls from SEZ units that completely depend on the US market and are on the verge of closure due to US tariffs under President Donald Trump. As many as 466 units have closed in the last five years (until FY25) in seven SEZs across the country, according to data shared by the Commerce and Industry Ministry in a written response to a Lok Sabha question.

US tariffs have resulted in two consecutive months witnessing a decline in Indian goods exports — September and October.

Modernising textile clusters

Amid concerns of irreversible damage to the textile sector due to tariffs and missed Summer orders, Sitharaman announced an integrated programme aimed at modernising the sector, focusing on each segment of the supply chain.

She announced the National Fibre Scheme for self-reliance in natural fibres such as silk, wool and jute, man-made fibres, and new-age fibres; Textile Expansion and Employment Scheme to “modernise traditional clusters with capital support for machinery”, technology upgradation and common testing and certification centres; National Handloom and Handicraft programme to “integrate and strengthen existing schemes and ensure targeted support for weavers and artisans”; and Tex-Eco Initiative to promote “globally competitive and sustainable textiles and apparel”.

India’s textile and apparel industry contributes 13% to industrial production, 12% to exports, and about 2% to GDP. Roughly 80% of India’s textile value chain is concentrated in Micro, Medium and Small Enterprise (MSME) clusters, each with its own specialisation.

In a letter to Vice President C P Radhakrishnan last month, Indian apparel exporters said sustained US tariffs in the absence of a trade deal could cause permanent damage to India’s market share, resulting in job losses, as there is no further shock-absorption capacity left.

Duty structure in labour-intensive sectors

After broad-based reforms, including the elimination of certain Quality Control Orders (legal directives issued by the government) and the reduction of duty on key input items such as cotton, Sitharaman announced further easing of the duty structure.

Indicating emphasis on the labour-intensive sector, she proposed to increase the limit for duty-free imports of specified inputs used for processing seafood products for export, from the current 1% to 3% of the Free on Board (FOB) value of the previous year’s export turnover.

“I also propose to allow duty-free imports of specified inputs, which is currently available for exports of leather or synthetic footwear, to exports of shoe uppers as well. I propose to extend the time period for export of final product from the existing six months to one year, for exporters of leather or textile garments, leather or synthetic footwear and other leather products,” Sitharaman said.

Container shortage

Sitharaman announced a Rs 10,000 crore container manufacturing scheme amid the continued shortage of the large boxes essential for trade, as well as India’s dependency on China for their supply. The allocation covers a five-year period and is aimed at creating “a globally competitive container manufacturing ecosystem.”

Triggered by the recent tensions in the Middle East, the Red Sea crisis resulted in concerns about the passage of ships through the region. The incident also exposed India’s dependency, which resulted in stopgap arrangements.

However, issues due to container shortages have persistently troubled traders since the Covid-19 pandemic. During the Board of Trade (BoT) meeting in November last year, Gujarat’s representative flagged the shortage of shipping containers and its impact on exporters. Further, Assam’s representative said tea exports from the state face hurdles due to “shipping line levies for empty containers”, in the context of the state being landlocked.

China is the largest exporter of containers, manufacturing around 95% of the large steel boxes globally. Much of the container manufacturing in China is done by a handful of highly subsidised, state-owned enterprises that have sparked security concerns in the US, EU, and India. The US has also initiated plans to de-risk its ports from over-reliance on Chinese containers and cranes. India also began production after 2021.