India's Economic Trajectory in a Fractured Global Landscape

By Chetna Gill

Cover Image Attribute: Marine Lines is a commercial area at South Mumbai, India / Source: Dr. Vikramjit Kakati via Wikimedia Commons

The Economic Survey 2025-26, tabled by India's Union Finance Minister Nirmala Sitharaman in Parliament on January 29, 2026, provides essential insights into India's economic outlook, guiding policy decisions amid ongoing international turbulence. This document, prepared by the Department of Economic Affairs under the Ministry of Finance, precedes the Union Budget 2026 and frames the government's perspective on fiscal and macroeconomic conditions. It projects real GDP growth for FY27—the fiscal year commencing in April 2026—at between 6.8 percent and 7.2 percent, a range that aligns with estimates from international bodies such as the International Monetary Fund (IMF), which anticipates 6.4 percent for FY27, and the World Bank, which expects 6.5 percent. For the current FY26, the survey aligns with the first advance estimates of 7.4 percent growth, surpassing the prior year's projection of 6.3 to 6.8 percent. This continuity in expansion, driven by domestic demand and policy adjustments, occurs against a backdrop of subdued global trade and heightened geopolitical tensions.
The survey's preface recounts the events of 2025, a year marked by initial optimism giving way to revised realities. Early expectations centered on robust domestic performance, with growth strengthening across quarters. The central bank implemented aggressive interest rate cuts and eased liquidity, while relaxing macroprudential measures introduced in 2023. The government delivered tax relief for households in the FY26 budget, achieving a fiscal deficit of 4.8 percent of GDP, slightly below the targeted 4.9 percent, and setting a 4.4 percent goal for FY26. This fulfilled a 2021 commitment to halve the deficit from 9.2 percent in FY21. Credit rating upgrades from Morningstar DBRS in May, S&P in August—from BBB- to BBB, the first from a major agency in nearly two decades—and R&I in September affirmed this fiscal discipline. However, external pressures, such as tariffs announced by the U.S. in April and August, challenged this discipline, prompting downward revisions in growth forecasts despite accelerated structural reforms.
Among these reforms, the survey notes a comprehensive overhaul of the Goods and Services Tax, the most significant since 2017, which aims to streamline tax collection and boost growth. Announcements in the budget to permit private sector involvement in nuclear power generation and full foreign direct investment in insurance progressed to implementation, signaling a more open investment environment. The four labour codes received notification, with rules anticipated soon, promising to modernize employment laws. Environmental norms relaxed, shifting from a uniform 33 percent green cover requirement to one based on polluting potential, easing compliance burdens. Quality Control Orders, which had burdened downstream industries, faced suspension, reducing regulatory constraints. These steps fostered a dynamic policy environment, contributing to projections of over 7 percent real growth for the full year, with similar expectations for the next. Yet, the survey highlights a persistent challenge: the Indian rupee's underperformance despite solid fundamentals, which could influence future growth.
On the other hand, India maintains a trade deficit in goods, partially offset by surpluses in services and remittances, necessitating foreign capital inflows for balance of payments stability. In 2025, these inflows diminished, leading to currency depreciation. The rupee fell 5 percent since the August tariffs, reaching a record low of 91.9850 per dollar on January 29, 2026, emerging as Asia's weakest currency. Foreign investors withdrew a record $19 billion from equities in 2025, continuing sales into January. The survey observes that the rupee "is punching below its weight," with its valuation failing to mirror strong economic indicators such as contained inflation, supportive agriculture, low external liabilities, healthy banks, comfortable liquidity, respectable credit growth, robust corporate balance sheets, and ample funding to the commercial sector. Policy efforts and governance bolster this foundation, yet the currency's weakness persists. An undervalued rupee mitigates some tariff impacts on exports and poses no inflationary threat from oil imports, given low crude prices. Nevertheless, it induces investor hesitation, meriting scrutiny.
This currency dynamic intersects with broader global conditions. The survey delineates three scenarios for 2026, each carrying implications for India's strategy. The optimal case, assigned a 40 to 45 percent probability, envisions continuity akin to 2025—integrated yet distrustful relations, with volatility from minor shocks necessitating active stabilization. Gold prices surged from $2,607 to $4,315 per ounce in 2025, later reaching $5,101.34 by January 26, 2026, embodying market apprehensions over a weakening U.S. dollar, negative real rates, and tail risks. The Global Economic Policy Uncertainty Index neared 2020 lows, excluding an April 2025 spike tied to tariffs, indicating lingering fear. A second scenario, with equivalent probability, foresees a disorderly multipolar breakdown: intensified rivalry, unresolved conflicts like Russia-Ukraine, unraveling security pacts, coercive trade, proliferating sanctions, politically driven supply chains, and transmitted financial stresses with diminished buffers. Policy nationalizes, forcing trade-offs between autonomy, growth, and stability.
The third, lower-probability outcome—10 to 20 percent—involves a systemic shock cascade, where financial, technological, and geopolitical stresses interact. Leveraged AI investments, exceeding $120 billion off-balance-sheet via special purpose vehicles, raise concerns over business model viability. IBM's CEO questioned Large Language Model economics, while Japanese Government Bond yields rose sharply. A correction here could tighten conditions, spur risk aversion, and affect broader markets, especially if coinciding with escalations. Consequences might exceed the 2008 crisis. Across scenarios, India's macroeconomic strengths—large domestic market, less financialized model, substantial reserves—position it favorably, though not immune. The survey advocates running "a marathon and sprint at the same time," emphasizing alignment among state, private sector, and households to convert headwinds into opportunities.
Geopolitical frictions compound these risks. The U.S. tariffs targeted textiles, marine products, gems and jewelry, auto components, and leather goods, yet India diversified: marine exports shifted to China and Malaysia, auto parts to the UAE. Ongoing negotiations with the U.S. aim for resolution in 2026, alongside deals with the European Union, New Zealand, and Oman. The survey views global volatility as translating into uncertainties rather than acute stress for India, with slower partner growth, trade disruptions, and capital flow fluctuations potentially affecting exports and sentiment. Inflation remains low, with the Reserve Bank estimating CPI at 2 percent for the year, below the 4 percent target, due to food price moderation—0.6 percent for December quarter, 2.9 percent for March. Nominal GDP growth for FY26 stands at 8 percent, under the budgeted 10.1 percent, influenced by this subdued inflation.
Historical context reveals variability in projections. FY24 growth reached 9.2 percent against a 6 to 6.8 percent forecast; FY25 hit 6.5 percent, within 6.5 to 7 percent; FY23 achieved 7.6 percent versus 8 to 8.5 percent; FY22 saw 9.7 percent amid base effects, with no projection due to COVID-19; FY21 contracted 5.8 percent from pandemic impacts. This pattern demonstrates resilience, yet the survey cautions against overreliance on past trends given evolving externalities. The Lowy Institute's Power Gap Index assigns India a -4.0 score, the lowest in Asia excluding Russia and North Korea, indicating untapped strategic potential. With 1.45 billion people pursuing prosperity democratically, India lacks direct emulable models. Aspirations confront a dominant power retrenching, global trade uncertainties, mounting frictions, and widening fault lines.
The document's chapters span fiscal consolidation, monetary management, external sector, inflation, agriculture, services, industry, investment, environment, education, health, employment, rural development, AI, and urbanization. Fiscal developments anchor stability: central finances improved, state finances overviewed, debt profiled, general government assessed. Monetary policy refines regulation amid global uncertainties. External trends emphasize long-term play: trade dynamics, India's performance, balance of payments. Inflation tamed: global and domestic views. Agriculture focuses productivity, income security. Services expand frontiers: global trends, sub-sectors. Industry seeks transformation: manufacturing recovery, inputs, initiatives, MSMEs. Infrastructure strengthens connectivity: financing, physical, energy, digital, social. Environment builds resilience: adaptation, mitigation, finance, regulation. Education and health evaluate effectiveness. Employment prioritizes skilling. Rural progress shifts to partnership: poverty reduction, economy transformation, inclusion. AI evolves ecosystem: context, approach, capital, governance, safety, roadmap. Urbanization addresses citizen needs: governance, constraints, informality, order, future aspects.
Two-part Chapter 16 explores strategic resilience. Part I shifts from import substitution to indispensability: swadeshi necessity, tiered indigenization, cost reduction, manufacturing discipline, entrepreneurial state, progression. Part II examines roles: state capacity constraint, capability as human system, regulatory component, private sector nation-building, citizen norms, deregulation. This framework urges collective effort to bridge the power gap.
Expert views diverge on capital inflows. Anubhuti Sahay, head of India economics research at Standard Chartered Bank, attributes reluctance to high global rates—4 to 4.5 percent in the U.S. without currency risk—eroding returns despite growth. She emphasizes easing business setup to attract investment. The survey concurs that macroeconomic success no longer assures currency stability, inflows, or insulation in a fractured system.
Investment and consumption may strengthen via reforms: tax cuts, labour overhauls, nuclear sector opening. The RBI's January bulletin notes sustained demand buoyancy, with 125 basis point rate cuts since February 2025, the most since 2019. India outpaces peers: IMF projects global 3.3 percent in 2026, 3.2 percent in 2027; Germany, U.K., Japan in low single digits. Yet, export slowdowns persist, unaffected by tariffs through diversification.
Chief Economic Adviser V. Anantha Nageswaran, authoring the report, scheduled a press conference post-tabling. The budget session, from January 28 to April 2, 2026, began with President Droupadi Murmu's address. The Union Budget follows on February 1.
In sum, the survey portrays an economy on stable footing, projecting steady advance amid uncertainties. It calls for caution without pessimism, as "the outlook, therefore, is one of steady growth amid global uncertainty, requiring caution, but not pessimism." Balancing domestic strengths with external vulnerabilities demands sustained policy vigilance, reform implementation, and stakeholder coordination. India's path forward involves adapting to a less coordinated, risk-averse world, where non-linear outcomes narrow safety margins. Achieving aspirations requires addressing the strategic power deficit, enhancing competitiveness, and fostering resilience. The coming budget will test this resolve, potentially buffering against shocks while sustaining momentum. India's overall response will determine its place in a changing order as long as global fragilities persist.

IndraStra Global is now available on
Apple News, Google News, Feedly, Flipboard, and  WhatsApp Channel

DISCLAIMER: The views expressed in this insight piece are those of the author and do not necessarily reflect the official policy or position of IndraStra Global.

COPYRIGHT: This article is published under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. https://creativecommons.org/licenses/by-nc-nd/4.0/

REPUBLISH: Republish our articles online or in print for free if you follow these guidelines. https://www.indrastra.com/p/republish-us.html