The Economic Survey 2025-26, tabled in Parliament on January 29, 2026, by Finance Minister Nirmala Sitharaman, presents an optimistic yet cautious outlook. As the Centre prepares the Union Budget for 2026-27, the stakes for Tamil Nadu have rarely been higher. For a state contributing nearly 9% to India’s GDP, expectations are not limited to fiscal allocations; they centre on whether national policy will align with local industrial realities. While last year’s budget leaned heavily on infrastructure expansion, the current moment offers a more layered opportunity for coordination between the Centre and the State.
The Survey places Tamil Nadu alongside Kerala and Andhra Pradesh as a national model for integrating environmental stewardship with industrial growth. It highlights the state’s district-level decarbonisation plans, the scaling up of solar parks, and the effectiveness of the Online Consent Management & Monitoring System (OCMMS) in reducing bureaucratic friction while maintaining environmental standards in industrial clusters such as textiles and tanneries. This recognition positions Tamil Nadu as a test case for balancing growth with sustainability.
A central idea introduced in the Survey is “Strategic Indispensability” — a shift from basic import substitution to becoming a critical node in Global Value Chains (GVCs). With high-tech activities now accounting for 46.3% of India’s manufacturing value added, Tamil Nadu’s expanding electronics ecosystem, often referred to as the “Electronics Valley of India”, is well placed to anchor this transition.
Automotive transformation: The Survey records a 33% rise in automotive production over the past decade. For Tamil Nadu, the emphasis on electric vehicle (EV) manufacturing sends a clear signal that state-led incentives in the EV ecosystem remain central to the national strategy. The state has emerged as a flagship success under the Production Linked Incentive (PLI) scheme, with realised investments in electronics and EV manufacturing transforming Hosur and Sriperumbudur into global hubs for high-value exports.
The Budget is expected to deepen incentives for advanced automotive technologies. Tamil Nadu is well positioned to capture proposed manufacturing incentives for drones and high-end semiconductor testing units, given its established industrial base and skilled workforce.
The inverted duty fix
Local EV manufacturers continue to press for rationalisation of the inverted duty structure, under which raw materials attract higher taxes than finished products. Correcting this anomaly in Budget 2026 could significantly lower production costs for “Made in Tamil Nadu” electric vehicles and improve competitiveness.
Tamil Nadu’s factories — the largest concentration in the country — are simultaneously bracing for global headwinds. A more protectionist US administration and the prospect of higher tariffs on Indian goods are already exerting pressure on sectors such as Coimbatore’s pumps, Tirupur’s textiles and Ambur’s leather industry.
Industry bodies are seeking an expansion of export-promotion missions and an extension of interest equalisation schemes for all MSME exporters to cushion potential tariff shocks, particularly in the US market.
Another sensitive issue is the regulatory environment governing gold loans. Small borrowers, farmers and traders who depend on gold as primary collateral are hoping the Budget will announce a formal relief framework to ensure uninterrupted credit access for loans under Rs 2 lakh.
The Survey projects service sector growth at 9.1% in FY26. Chennai’s emergence as a preferred destination for Global Capability Centres in fintech and SaaS aligns with the Survey’s emphasis on IT and digital services as key growth drivers. It also flags medical and wellness tourism as a new frontier — an area where Chennai’s status as a healthcare hub offers a clear advantage.
A significant theme in the Survey is the “Blue Economy” and ocean-based services, including a $4.9 billion strategy to build a competitive shipbuilding industry. With ports at Ennore, Chennai and Thoothukudi, Tamil Nadu stands to gain from infrastructure investments aimed at strengthening maritime logistics and the coastal economy.
The Survey reiterates that public capital expenditure has a high multiplier effect. Tamil Nadu’s ongoing projects — Metro Rail Phase II and peripheral ring roads — align closely with the Centre’s push to channel around 4% of GDP into effective capex. A dedicated chapter on “Making India’s Cities Work” suggests that highly urbanised states like Tamil Nadu will face greater pressure, but also greater opportunity, to implement the 23 priority deregulation initiatives outlined to improve urban governance.
One of Tamil Nadu’s biggest recent gains has been the reclassification of Chennai Metro Phase II as a Central Sector Project, shifting a substantial financial burden from the State to the Centre.
Budget 2026 must back this approval with aggressive capital disbursement. To meet the 2028 completion target, the state expects a dedicated outlay to accelerate work across the 118.9-km network.
Given the strong multiplier effect of urban rail on local economies, this remains a “must-have” the Centre is likely to deliver to sustain its infrastructure narrative.
With Tamil Nadu’s economy projected to maintain momentum, the salaried middle class is looking for inflationary breathing space.
For the New Tax Regime to gain wider acceptance in cities like Chennai, there is strong expectation of a higher standard deduction. Even a modest increase would translate into meaningful annual savings for a professional earning Rs 15 lakh, easing household cash flows.
The proposed restructuring of rural employment guarantees into more modernised programmes will be crucial for Tamil Nadu’s delta districts, where agricultural labour remains the economic backbone.
Despite sharp political rhetoric between the Centre and the State, the economic data underline mutual dependence. If Budget 2026 delivers infrastructure funding and MSME credit support, it will not only validate the Survey’s optimism but help keep the ‘Detroit of India’ running at full throttle.
The author is founder, Infisum and non-resident fellow, NITI Aayog