Budget 2026: India Recalibrates Foreign Aid with Strategic Focus on Neighbours and Global Institutions

The Union Budget 2026–27 has allocated over ₹11,180 crore for financial assistance to foreign governments and contributions to international organisations, marking a recalibration of India’s external development strategy. The allocations reflect New Delhi’s evolving diplomatic priorities as it balances regional responsibilities, geopolitical pressures, and its growing role in multilateral institutions.

The Ministry of External Affairs remains a key conduit for India’s overseas development assistance, with funds directed toward grants, limited loans, and mandatory contributions to global bodies. While the overall envelope remains substantial, the distribution of funds highlights a more selective and strategically aligned approach, shaped by regional stability concerns, sanctions regimes, and shifting bilateral relationships.

A six-month exemption from US sanctions applicable to Chabahar port is valid until April. | Hindustan Times

Bhutan, Nepal and the Indian Ocean Region Anchor India’s Neighbourhood Strategy

Bhutan continues to be the largest recipient of Indian assistance, receiving over ₹2,288 crore in grants and loans. The funding is primarily directed toward hydropower generation, infrastructure development, and capacity-building projects that are central to the long-standing India–Bhutan development partnership. These initiatives also support regional energy security and economic integration.

Nepal has been allocated ₹800 crore, underscoring India’s continued support for reconstruction, connectivity, and development cooperation. The Maldives and Mauritius have each received ₹550 crore, reinforcing India’s strategic focus on the Indian Ocean region and its maritime neighbourhood. These allocations are aligned with India’s broader efforts to strengthen economic and security partnerships across key island nations and littoral states.

Sri Lanka has been allotted ₹400 crore as it continues its recovery from economic distress, while Myanmar will receive ₹300 crore amid political instability and humanitarian challenges. Afghanistan has been allocated ₹150 crore, largely for humanitarian and essential development support, reflecting India’s continued engagement with the Afghan people despite the complex political environment.

Bangladesh Aid Reduced Amid Evolving Bilateral Dynamics

One of the most notable shifts in Budget 2026 is the sharp reduction in assistance to Bangladesh. The allocation has been cut to ₹60 crore, down from ₹120 crore in the previous year’s budget estimate. Revised figures from the last fiscal year had already indicated lower disbursements, and the latest reduction reflects changing bilateral dynamics and political developments in the region.

The cut signals a reassessment of India’s development assistance posture toward Dhaka, as New Delhi adapts its engagement strategy in response to evolving regional alignments and domestic developments within Bangladesh.

Chabahar Port Funding Dropped Due to Sanctions and Geopolitical Constraints

In a significant strategic shift, the 2026 budget makes no allocation for Iran’s Chabahar Port project. The port had previously been supported by India as a critical connectivity corridor to Afghanistan and Central Asia, offering a route that bypasses Pakistan.

The removal of funding is widely linked to renewed U.S. sanctions on Iran and the narrowing scope of sanctions exemptions related to Chabahar. This decision reflects the increasing impact of geopolitical constraints on India’s overseas infrastructure investments and signals a pause in fresh financial commitments to the strategically important project.

Strengthened Contributions to Multilateral and Global Institutions

Beyond bilateral assistance, the budget has earmarked approximately ₹2,911 crore for contributions to international and multilateral organisations. These include funding for the United Nations system, the International Development Association, the Asian Development Fund, and other institutions involved in development finance, health, labour, education, and nuclear cooperation.

These commitments underline India’s expanding role as a stakeholder in global governance and development finance. They also support India’s broader Global South outreach, positioning the country as both a regional leader and an increasingly influential participant in multilateral decision-making forums.

The MGMM Outlook

India’s Budget 2026–27 signals a sharper alignment between foreign aid and strategic priorities, with assistance increasingly concentrated on neighbours and regions that directly affect India’s security, connectivity, and regional influence. Continued strong support for Bhutan, Nepal, and key Indian Ocean partners reflects a focus on stabilising India’s immediate periphery while advancing energy security, infrastructure integration, and maritime partnerships. Allocations to Sri Lanka, Myanmar, and Afghanistan indicate a calibrated mix of humanitarian engagement and regional responsibility, even amid political instability. At the same time, enhanced contributions to multilateral institutions underline India’s growing role in shaping global development agendas and reinforcing its leadership position within the Global South.

The budget also reflects a tougher, more pragmatic approach where geopolitical realities and evolving bilateral dynamics are influencing funding decisions. The reduction in assistance to Bangladesh points to a reassessment of engagement in response to changing regional and political conditions, while the removal of funding for Iran’s Chabahar Port highlights how sanctions and great-power pressures are constraining overseas infrastructure ambitions. Together, these shifts point to a development diplomacy that is more selective, interest-driven, and closely tied to India’s strategic calculus, balancing neighbourhood leadership with the constraints of an increasingly complex international environment.

(Sources: OpIndia, Indian Express, Hindustan Times)