A budget is expected to flag the issues both currently faced by the economy and likely to emerge in the coming year. And, to provide correctives for them. The economy has been facing severe challenges in 2025-26 and these are likely to persist in 2026-27. The Union Budget 2026-27 has to deal with them. So, it cannot be a routine budget. Bold steps would be needed to mitigate the problems faced by the economy and its marginalised sections.Issues and challenges2025-26 has been characterised by uncertainty due to Trump’s acting as the King who has overturned all global economic political and social agreements. He has levied protectionist tariffs on imports into the US, asked US Multinational Corporations (MNCs) to not invest abroad but in the US, limited export of high technology items to other nations and reduced grant of H1B visas to limit access of Indian professionals to work in the US, etc. Further, he has threatened and attacked other countries directly or through proxies like, Israel, aggravated social strife in the US and promoted right wing regimes abroad.Trade agreements arrived at under US leadership at World Trade Organisation (WTO), have been repudiated in favour of one-sided bilateral agreements. The closest allies of US have had to grant concessions. India has been hit with the highest tariffs, thereby, impacting the Indian economy and resulting in threat of closure of labour intensive units in apparel, leather goods, marine products, etc.. Thus, worsening India’s unemployment problems.India had a big trade surplus with the US and that is adversely impacted. So, the Rupee has weakened against the dollar, making imports more expensive and adding to non-food inflation. This is also fueled by net Foreign Direct Investment (FDI) and Foreign Institution Investors (FII) pulling out of India because returns in dollar terms have decreased compared to the US which is witnessing a boom in technology stocks.This has resulted in instability in the stock markets and increased uncertainty. It has also adversely impacted private investments in India, in spite of increased public investment; consequently impacting growth of the economy and employment generation.Officially, it is claimed that the economy is growing fast but indications are of mounting problems. With the International Monetary Fund (IMF) giving Indian GDP data a ‘C’, because of difficulties with the informal sector data, etc., it is clear that official data captures largely the organized sector growth and not that of the whole economy.Trade deals: New policyIf the government continues to believe that economy is doing well in spite of the adverse global situation then this would be delusional.India has been bending backward to meet US demands and has signed trade deals with UK, European Union (EU), etc., and is negotiating with other nations. This is a reversal of protectionist policies pursued since 2015. Tariffs were raised to protect Indian manufacturing and concessions granted under the Production Linked Incentive (PLI) scheme to boost the economy.In the trade deals (like with UK and EU) India is offering zero tariff. According to Reuters, in the EU deal, “India completely scraps tariffs on most industrial imports from EU, including machinery and electrical equipment (currently at 44%), chemicals (up to 22%) and pharmaceuticals (11%)”. And, India has agreed to sharply cut tariffs on EU agri-food, olive oil, processed foods and some fruits. How can this not adversely impact production of these items in India?India is granting these concessions to get “Tariffs cut to zero on key Indian exports to the EU, including marine products (currently at up to 26%), chemicals (12.8%), plastics/rubber (6.5%), leather/footwear (17%), textiles (12%), apparel (4%), base metals (10%), and gems and jewellery (4%)…” (Reuters).India has been loath to open up agriculture since Indian farmers cannot compete against the heavily subsidised EU farmers. As it is, Indian farmers have not been getting the minimum support prices and if imports of food items are allowed, prices of these items will dip further and worsen the plight of Indian farmers.Would the gains in some sectors balance the losses in those sectors where India will cut tariffs? Past experience suggests that India has not gained from bilateral trade agreements (like with, Australia and Korea). Further, without a trade deal India had a $50 billion surplus with the US. China does not have a trade deal with India but enjoys a $102 billion surplus. So, trade deals are not crucial. But India and other nations are rushing to them due to Trump’s actions.While it is clear that India’s imports will rise and impact those sectors where tariffs are being reduced it is less clear that India’s exports will rise since that will depend on what other competing nations do. Thus, the trade deficit could increase in spite of the bilateral trade deals and shrink the Indian market.Steps requiredIndian government’s change in policy has been forced by Trump’s actions. From protecting the economy, India has decided to throw it to the wolves by opening up parts of agriculture and industry. Given the weak technological base and vast numbers of farmers and small and micro sector units, India will lose unless government steps in to support the marginalised.This requires a mindset change from external orientation to focus on the internal markets by boosting the incomes of the marginalized. Minimum Support Prices have to be not only ensured but extended to all crops. An increase in support to farmers and workers will be needed. This has to be done even if it falls foul of WTO rules. The micro and small units (not MSME) needs to be made viable.Budget needs to prioritise labour intensive sectors like, education, health, agriculture and rural areas. MGNREGA needs to continue rather than be replaced by the supply driven VB G RAM G bill and allocations to it need to be increased. Resources for all this need to be raised via direct taxes by eliminating concessions and implementing effective wealth tax, etc.In brief, Trump has confused Indian policy makers. They want to boost internal markets but are throwing open Indian markets to foreigners. Free trade is optimal only under ‘First Best’ but the world is ‘Second Best’ and more so with Trump’s protectionism. The US market has contracted for India and the trade deals are unlikely to compensate for that since they will provide selective benefits to some sectors but on the whole marginalize the Indian workers and farmers. The only option for India is to reduce dependence on the external markets and boost internal markets via income support to the marginalised which can more than make up for the loss of external markets.Arun Kumar is a retired professor of economics at JNU. He is the author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020.