In a significant recalibration of its regional priorities, the Government of India slashed its foreign aid to Bangladesh by 50% in the Union Budget 2026-27, presented on February 1, 2026.
The allocation has been reduced to ₹60 crore, down from the ₹120 crore earmarked in the previous fiscal year. This marks one of the steepest cuts in India’s “Neighborhood First” portfolio.
1. The “Frosty Ties” Context
The 50% reduction is widely viewed as a direct response to the deteriorating diplomatic relationship between New Delhi and Dhaka following the ouster of Sheikh Hasina in August 2024.
- Underutilization of Funds: Budget documents reveal that while ₹120 crore was allocated last year, only ₹34.48 crore was actually disbursed. The new ₹60 crore figure reflects a more “realistic” (and cautious) baseline for current engagement.
- Security Concerns: The Ministry of External Affairs (MEA) has repeatedly raised concerns regarding the safety of minority communities in Bangladesh and the rise of extremist rhetoric under the interim government.
- Geopolitical Realignment: Dhaka’s recent moves to restore direct air and sea connectivity with Pakistan—after a 14-year hiatus—have signaled a major shift in its regional alignment, prompting New Delhi to pull back on development assistance.
2. Comparing Neighborhood Allocations
While aid to Bangladesh and the Maldives (down 8% to ₹550 crore) saw cuts, India significantly increased support for other key partners to secure its regional influence.
| Recipient Country | Budget 2026 Allocation | Trend |
| Bhutan | ₹2,289 Crore | ↑ 6% (Largest Recipient) |
| Nepal | ₹800 Crore | ↑ 14% |
| Sri Lanka | ₹400 Crore | ↑ 33% |
| Afghanistan | ₹150 Crore | ↑ 50% (Humanitarian Aid) |
| Bangladesh | ₹60 Crore | ↓ 50% |
3. The Chabahar Port “Zeroing Out”
In a related move that stunned analysts, the budget for the Chabahar Port in Iran was cut to zero.
- The US Factor: This decision follows the looming expiration of US sanctions waivers on April 26, 2026, under the Trump administration’s “hawkish” stance toward Tehran.
- Project Status: While India committed to a 10-year operating agreement in 2024, the zero-allocation suggests a temporary suspension of new capital funding until the sanctions environment stabilizes.
4. Strategic Implications for MEA
The total budget for the Ministry of External Affairs rose to ₹22,118 crore, but the internal shift is clear:
- Infrastructure over Ideology: Funding is being funneled toward “reliable” partners like Bhutan (hydro-power) and Nepal (connectivity) where projects are moving at pace.
- Wait-and-Watch: The Bangladesh cut is being interpreted as a “strategic pause” ahead of the country’s upcoming general elections, with New Delhi keeping its financial leverage dry until a stable political partner emerges.
Conclusion: A Selective Neighborhood Policy
The 2026 Budget signals the end of “blank-check” diplomacy for India. By halving aid to Bangladesh and pausing Chabahar funding, India is prioritizing geopolitical loyalty and project viability over general regional goodwill. For Dhaka, the ₹60 crore figure is a stark reminder that economic assistance from its largest neighbor is now strictly conditional on regional stability and security cooperation.
