The Union Budget 2026-27, presented on February 1, 2026, has significantly boosted the prospects for aircraft manufacturing in India by removing the basic customs duty on critical components. This move is expected to encourage domestic manufacturing, reduce reliance on imports, and potentially create new job opportunities within the aviation sector.
Key Provisions and Impact
Finance Minister Nirmala Sitharaman announced the removal of the 5% basic customs duty on components and parts required for manufacturing civilian, training, and other aircraft. The exemption also extends to raw materials imported for aircraft maintenance, repair, and overhaul (MRO) services within the defense sector. This decision addresses a long-standing request from the aviation industry and is seen as a crucial step in realizing the "Make in India" vision in the aerospace sector.
Beneficiaries and Industry Outlook
The elimination of customs duties is a major incentive for companies like Adani Group and Hindustan Aeronautics Ltd (HAL), both of which have ambitious plans to manufacture passenger planes in India. HAL is reportedly planning to partner with Russia's Sukhoi to produce the SJ-100 regional aircraft within three years, while Adani has partnered with Brazil's Embraer to assemble regional aircraft in India. Setting up aircraft manufacturing lines involves importing a large number of components and spares, which previously attracted basic customs duties ranging from 2.5% to 10%.
Seaplane Manufacturing
In addition to the customs duty exemptions, the budget includes a scheme to promote local seaplane manufacturing and operations. The government plans to introduce a Viability Gap Funding (VGF) scheme to support seaplane operations, aiming to improve connectivity to rivers and coastal areas. Water aerodromes require significant infrastructure investments, including floating jetties, passenger terminals, and refueling facilities.
Concerns and Challenges
While the budget initiatives are generally welcomed, some analysts have pointed out potential challenges. One concern is that India primarily assembles aircraft rather than manufacturing them. This "manufacturing" process often involves importing 85-90% of components duty-free, conducting the final assembly locally, and then labeling the product as "Made in India". According to this view, exempting the remaining 5-10% basic customs duty mainly subsidizes foreign manufacturers to perform final integration in India rather than abroad. True aircraft manufacturing necessitates metallurgical capabilities for airframe-grade alloys, engine design and fabrication, avionics integration, and certification infrastructure meeting international airworthiness standards, all of which India currently lacks.
UDAN Scheme and Regional Connectivity
The budget also addresses regional connectivity through the UDAN (Ude Desh Ka Aam Nagrik) scheme. While the scheme has expanded air connectivity to tier-two and tier-three cities, concerns remain about its long-term sustainability. A significant percentage of routes awarded under UDAN have not commenced operations, and many that do start are unable to sustain themselves beyond the subsidy period.