As South Asia navigates economic recovery and geopolitical rivalries, India’s budget signals a nuanced approach, prioritising mutual benefits over unconditional support. This could reshape alliances, with potential for improved ties post-Bangladesh’s February elections.
In a move reflecting evolving geopolitical dynamics, India’s union budget for 2026-27 has recalibrated its foreign aid allocations, prioritizing strategic partnerships while scaling back support amid tensions. Presented by Finance Minister Nirmala Sitharaman, the budget allocates approximately Rs 5,686 crore for aid to countries, a modest 4 per cent increase from the previous year. This adjustment underscores India’s ‘Neighbourhood First’ policy, focusing on infrastructure, energy, and economic stability in South Asia and beyond, even as global pressures like US sanctions influence decisions.
The ministry of external affairs (MEA) received a total outlay of Rs 22,118 crore, up from Rs 20,516 crore in the prior budget estimate. Aid forms a critical component, supporting projects in hydropower, railways, and disaster relief. However, cuts to certain nations highlight diplomatic strains, including minority rights concerns and regional instability.
India’s foreign aid emphasises connectivity and countering external influences, such as China’s growing footprint in the region. Bhutan remains the top recipient, followed by Nepal and Maldives. Allocations to Latin America doubled to Rs 120 crore, while African nations stayed at Rs 225 crore. No funds were set aside for Pakistan, aligning with longstanding tensions.
Bhutan Leads
Bhutan, India’s closest ally, saw its aid rise by Rs 138 crore to Rs 2,288 crore from Rs 2,150 crore last year. This boost supports key hydropower initiatives, including the full commissioning of the Punatsangchhu-II project in 2025, which increased power generation by 40 per cent. Plans to resume the Punatsangchhu-I project and build railway links from Banarhat to Samtse and Kokrajhar to Gelephu, costing over Rs 4,000 crore, aim to deepen economic ties. A Rs 4,000-crore Line of Credit for Bhutan’s energy sector further cements this partnership, vital for India’s energy security and border stability.
Nepal Boosted
Aid to Nepal increased by Rs 100 crore to Rs 800 crore, making it the second-largest recipient. This 14 per cent hike from the previous allocation reflects India’s commitment to infrastructure and people-to-people ties amid Nepal’s political turbulence in 2025. Projects include roads, railways, and energy links, helping counterbalance Chinese investments. The increase also supports disaster relief, recalling India’s aid during the COVID-19 pandemic.
Maldives Supported
The Maldives received Rs 550 crore, a slight reduction of Rs 50 crore in some estimates, but maintaining substantial support. This allocation focuses on infrastructure and economic stability in the Indian Ocean archipelago, where India competes with China for influence. Recent diplomatic engagements have stabilized ties after earlier strains.
Mauritius Enhanced
Mauritius, a key partner in the Indian Ocean, saw its aid rise to Rs 550 crore, up 10 per cent. Funds support development projects, leveraging strong cultural and economic bonds. As a hub for Indian investments, this aid reinforces maritime security cooperation.
Sri Lanka Aided
Sri Lanka’s allocation jumped by Rs 100 crore to Rs 400 crore, a one-third increase. This boost aids post-crisis recovery, including infrastructure and capacity building. India’s role as a first responder during Sri Lanka’s 2022 economic meltdown continues, with emphasis on ports and energy ties to foster regional stability.
Afghanistan Engaged
Aid to Afghanistan rose by Rs 50 crore to Rs 150 crore, signalling cautious re-engagement with the Taliban regime. After severing ties in 2021, India reopened its Kabul embassy in October 2025 and hosted diplomatic visits. Funds support humanitarian efforts, education, and health, amid concerns over terrorism and minority rights.
Myanmar Reduced
Myanmar’s aid was cut by 14 per cent to Rs 300 crore, due to ongoing political instability and implementation challenges. Border security issues, including refugee influxes, have strained relations. The reduction reflects a pragmatic approach, focusing on essential connectivity projects like the Kaladan Multi-Modal Transit Transport Project.
Bangladesh Strained
Bangladesh faced the sharpest cut, with aid halved to Rs 60 crore from Rs 120 crore. Strained ties followed the August 2024 ouster of Sheikh Hasina, violence against Hindus, and Dhaka’s warming relations with Pakistan. Revised 2025-26 spending was only Rs 34 crore. India has restricted visas and withdrawn diplomats’ families, impacting trade and sports ties, such as Bangladesh’s T20 World Cup withdrawal.
Iran Halted
No funds were allocated for Iran’s Chabahar port project, down from Rs 400 crore in 2025-26 revisions. US sanctions, with a waiver expiring in April 2026, prompted the zero allocation. The port, crucial for bypassing Pakistan to access Afghanistan and Central Asia, faces uncertainty despite India’s long-term lease.
Regional Implications
These shifts highlight India’s strategic diplomacy: bolstering allies like Bhutan and Nepal while responding to threats in Bangladesh and Myanmar. Analysts note the budget counters China’s Belt and Road Initiative through targeted aid. For Afghanistan and Iran, decisions balance humanitarian needs with international pressures. Overall, the allocations promote regional stability, trade, and security, with India positioning itself as a reliable partner amid global uncertainties.
As South Asia navigates economic recovery and geopolitical rivalries, India’s budget signals a nuanced approach, prioritising mutual benefits over unconditional support. This could reshape alliances, with potential for improved ties post-Bangladesh’s February elections.
