As 2026 unfolds, the global economic environment is adjusting to a turbulent start to the year, shifting trade dynamics, and ongoing geopolitical uncertainty.

Growth is losing momentum as major economies absorb the after effects of tighter monetary policies, waning post pandemic demand, and elevated debt burdens. At the same time, global trade flows are being rewired: companies are rethinking supply chains, governments are leaning into protectionist measures, and ‘friend shoring’ is beginning to replace decades of expansionary globalisation.

These changes are accompanied by geopolitical tensions, including ongoing conflicts, sanctions, and disruptions in energy markets. As a result, businesses and policymakers face slower growth and also increased volatility.

Against this uncertain global backdrop, India stood out in 2025 as one of the world’s strongest and most resilient major economies. While many countries grappled with slower growth and policy headwinds, India continued to build on its post pandemic momentum, driven by solid domestic demand, a buoyant services sector, and steady investment activity.

According to the First Advance Estimates released by the Ministry of Statistics and Programme Implementation (MoSPI), India’s economy is estimated to have grown 7.4% in FY2025 26, a notable uptick from 6.5% in the previous fiscal year. This makes India the fastest growing major economy, even as global growth softened.

India’s robust economic momentum in 2025 was mirrored—though not without challenges—in the performance of its chemical sector. As the broader economy grew an estimated 7.4% in FY2025 26, supported by strong consumption, investment, and services expansion, the chemical industry both benefited from and contributed to this growth cycle.

Having said the above, the sector’s own growth trajectory in 2025 reflected a mix of structural strength and cyclical pressure. On the structural side, India’s chemicals market was valued at $220 billion in 2023 and is poised to grow to around $400 to 450 billion by 2030, with aspirations to reach about $850 to 1,000 billion by 2040 complemented by the Government’s support . 

India is the 6th largest chemical producer globally and 3rd in Asia, with a portfolio spanning 80,000+ products and exports to 175+ countries—a backbone for manufacturing, agriculture, and consumption.

At the same time, 2025 was a challenging year operationally, as global conditions shaped the sector’s performance. Oversupply, especially from China, kept prices under pressure across several commodity chains, while sluggish European demand and inventory adjustments affected export profitability.

Yet, even amid this downturn, the sector’s underlying momentum remained intact. Rising domestic consumption across various sectors aided demand for both commodity chemicals and higher value specialties. Export competitiveness also held firm in many sub segments, supported by India’s cost advantage and increasing global preference for diversified sourcing.

In essence, India’s chemical sector in 2025 moved in step with the overall economy: resilient, expanding in its core segments, but navigating a complex global environment. This interdependence between macro growth and chemical sector demand sets the stage for why the industry’s expectations from the Union Budget 2026 to be announced on 1 February 2026 carries strategic importance.

Some of the key expectations from Budget 2025 for the chemical sector are as under:

Production Linked Incentives (PLI): A top priority for the industry is the long-awaited extension of the PLI scheme to chemicals to encourage domestic production, drive innovation, and make Indian manufacturers more competitive on a global scale. This could help achieve the following:

Reducing import dependency: By strengthening the domestic manufacturing of chemicals, the PLI scheme can help reduce India's reliance on imports thereby making India more Atmanirbhar. This is particularly important for ensuring the availability of critical raw materials and intermediates.

Promoting investment: The financial benefits provided under the PLI scheme can make the sector more attractive to investors, both domestic and foreign. This can lead to an influx of capital, which is crucial for expanding manufacturing facilities, generating employment in the chemical sector and adopting new technologies.

Driving innovation: With additional resources available through the PLI scheme, companies may be more inclined to invest in research and development. This can lead to the creation of innovative technology, sustainable products and efficient processes that can give Indian manufacturers a competitive edge in the global market.

Employment generation: Expansion of the manufacturing sector as a result of the PLI scheme can lead to the creation of new jobs not only in the chemical industry but also in the end use sectors, which is vital for economic growth and social stability.

Export promotion: With increased production and improved competitiveness, companies can expand their presence in international markets, leading to a growth in exports.

Sustainable practices: The PLI scheme can also be structured to promote environmentally sustainable manufacturing practices, aligning with global trends and regulatory requirements.

Building infrastructure that can support scale

For the chemical industry to unlock its full potential, the industry emphasises the need for world class industrial and logistics infrastructure. This includes strengthening Petroleum, Chemicals and Petrochemicals Investment Region (PCPIRs), enhancing port linked chemical ‘plug-in’ hubs, and ensuring faster, clearer regulatory processes. Simplifying approvals—particularly environmental clearances—and enabling genuine single window mechanisms would significantly reduce project commissioning timelines. Improved infrastructure would also support India’s broader ambition of raising manufacturing’s share in GDP.

Accelerating the shift toward sustainable manufacturing

With safety, compliance, and sustainability becoming core to global supply chains, industry players are hopeful that Budget 2026 will prioritise the development of green chemical zones. 

These hubs—powered by renewable energy and supported by incentives for cleaner production technologies—could help India stay ahead of tightening global environmental standards and attract companies focused on low‑carbon manufacturing.

Investment into research and development (R&D)

To meet the rising international demand for specialized products and align with global standards, including sustainability objectives, Indian chemical companies need to prioritize R&D more heavily. To promote R&D investment, the introduction of a supportive regulatory framework for new agricultural technologies, such as biological products, is anticipated. Additionally, it may be considered to allow Micro, Small & Medium Enterprises to allocate their compulsory Corporate Social Responsibility contributions to R&D activities.

Securing Free Trade Agreements (FTAs) to support Industry growth

Moving forward, India could negotiate FTAs that incorporate specific provisions for the chemicals industry. This can include incorporating industry focused protections such as tariff quotas or selective duty exemptions on critical raw materials and petrochemical feedstocks.

Rationalization of customs duty exemptions and review of certain FTAs:

The industry is also looking closely at how the government might reshape India’s customs and trade frameworks in this Budget. The sector believes that earlier duty concessions, once useful, are no longer suitable for the present competitive landscape. In several chemical segments where India now has meaningful capacity, these concessions end up giving imported products a cost advantage, leaving domestic manufacturers with lower utilisation levels and tighter margins. With global prices already under pressure due to oversupply, a more calibrated approach to exemptions is needed to ensure that Indian producers can compete fairly.

There is a similar call to revisit certain Free Trade Agreements (FTAs). While these agreements have opened doors for Indian exports, they have also enabled an influx of low priced imports from partner countries that enjoy scale, cheaper feedstocks, or favourable subsidies. This has created substantial pricing pressure in multiple chemical value chains, even in areas where India is fully capable of meeting domestic demand. Revisiting rules of origin, fine tuning tariff benefits, and reinforcing trade remedy tools could help bring greater balance to the market.

Inverted duty structure

The issue of inverted tax structure affects companies which deal in products where GST rate on inputs is higher than the rate on outputs, leading to the accumulation of input tax credit. While there is a provision to claim refunds in such scenarios, it is limited to inputs, excluding input services. Fertilizer companies supplying products taxed at 5% GST often incur significant GST costs on input services at 18%, contributing substantially to input tax credit accumulation, with no refund mechanism available for these services.  There is a need to amend the inverted GST refund mechanism to enable companies to claim GST refund in respect of input services.

The Indian chemical industry, in the face of its current challenges, has been advocating for targeted policy measures to bolster its competitiveness. The introduction of PLI scheme and the development of PCPIRs, along with other sector-specific incentives, would be a boost for the industry. Such initiatives would incentivize domestic production, attract significant investment, and foster an ecosystem conducive to innovation, growth, and sustainability.

As India heads into Budget 2026, there is an expectation that the government will lay down a roadmap that both sustains economic momentum and deepens the country’s manufacturing strength. For the chemical industry, which sits at the intersection of infrastructure, innovation, industrial and agricultural growth, the upcoming Budget represents an opportunity to address long standing bottlenecks while unlocking the next phase of expansion.

Budget 2026 is expected to outline how India plans to position itself amid global changes that are reshaping supply chains and manufacturing priorities. Though the details will be unveiled on 1 February, the industry is keenly anticipating steps that could put the chemical sector on a stronger growth track and help India compete more assertively on the world stage.

(By Aashish Kasad, Senior Partner, Ernst & Young LLP and National Leader – Chemicals and Agri sector and Pari Shah, Director, EY LLP)