India’s growth story needs policy depth, not populism

As India stands on the cusp of its Union Budget for 2026-27, the Economic Survey 2025-26 has set the analytical and policy stage for the nation’s fiscal priorities.

It presents a cautiously optimistic assessment of India’s economy with a growth projected at 6.8–7.2 per cent and claims that the country remains a global outlier in a slowing world economy.

Meanwhile, the survey also flags structural constraints that could limit medium-term growth if left unaddressed. The upcoming Budget is therefore less about headline populism and more about policy fine-tuning to sustain momentum, manage risks, and deepen structural reforms.

The survey is more than a statistical recitation: it is a narrative of transformation, resilience, and caution amidst persistent global uncertainty. Yet, beneath the headline figures lies a more complex and nuanced macroeconomic landscape — one that requires careful policy calibration in the forthcoming Budget.

It underscores that the economic growth continues to be underpinned by strong domestic demand, particularly robust consumption and sustained investment activity. Private consumption accounts for roughly 61.5 per cent of GDP, a level that rivals some of the highest historical readings. Rural demand remains buoyant on the back of strong agricultural output, while urban consumption is supported by eased inflation and wage growth.

This domestic demand cushion has helped insulate India to some degree from faltering global external demand. Still, the macroeconomic backdrop is one of “caution not pessimism” — acknowledging external vulnerabilities while pointing to internal strengths.

Inflation trends have been broadly benign, allowing the Reserve Bank of India (RBI) to maintain a supportive monetary stance. Coupled with improving bank balance sheets — with gross NPA ratios at multi-decadal lows — Indian financial intermediation is relatively well positioned to support growth. Nonetheless, the cost of capital remains a structural concern.

India’s high reliance on bank financing and the current tax treatment of debt instruments contributes to a persistent premium on borrowing costs. The survey advocates tax reforms in debt markets — including rationalisation of rates — to deepen corporate access to capital.

Experts claim that fiscal management continues to strike a balance between consolidation and growth-oriented spending. The fiscal deficit narrowed to 4.8 per cent of GDP in FY25, beating targets, and is projected to improve further in FY26. Capital expenditure has risen sharply — more than fourfold since 2018 — and now represents a central plank of India’s growth strategy, particularly in infrastructure expansion and connectivity projects.

At the same time, the survey also warns of state-level fiscal pressures, especially rising revenue deficits driven by unconditional cash transfers and populist spending, which could crowd out productive capital formation.

On the external front, India enjoys robust foreign exchange reserves — covering roughly 11 months of imports — and a comfortable short-term debt position. Though the opposition ecosystem does not agree, the government claims that exports reached record levels enhanced by dynamic services exports, particularly in IT and professional services.

Yet the focus on external vulnerabilities is striking. The rupee experienced depreciation pressures in 2025, partly due to volatile capital flows and geopolitical headwinds. This underscores India’s exposure to global financial conditions, and the strategic imperative to deepen trade diversification and reduce external imbalances. The Economic Survey highlights evolving sectoral dynamics offering both opportunities and policy imperatives.

Manufacturing activity has shown signs of structural recovery, with robust growth in industry GVA and a pickup in capacity utilisation. Initiatives like the Production Linked Incentive (PLI) schemes have catalysed investment across 14 sectors, attracting over ₹2 lakh crore and generating significant employment. These schemes are central to India’s ambition to move up global value chains in electronics, pharmaceuticals, and other high-value industries.

Moreover, India’s semiconductor mission has advanced domestic capabilities with projects spanning multiple states — a critical step in reducing strategic technology dependencies.

Services continue to lead the growth trajectory, with sustained high growth in tradable and digitally enabled services. The strength of India’s services exports has been a notable macroeconomic stabiliser, contributing to export and foreign exchange resilience. This sector — encompassing IT, finance, and a growing digital economy — will remain a key focus in the Budget, especially in terms of skills development, regulatory simplification, and export facilitation.

Similarly, infrastructure development is a lynchpin of India’s growth strategy. From highways and rail electrification to aviation expansion and renewable energy deployment, the survey maps a transformative thrust in physical capital. High-speed corridors, electrified rail networks, and energy capacity additions are not just growth multipliers but also inclusivity engines across regions.

The survey places novel emphasis on emerging sectors such as space services, where India’s market — currently valued at over $8 billion — is projected to expand multifold over the next decade, driven by private sector participation and technology innovation.

For the first time, a distinct chapter on Artificial Intelligence (AI) and frontier technologies signals the government’s intent to integrate technological leadership with economic strategy. Harnessing AI across agriculture, manufacturing, health, and governance could be a decisive differentiator in productivity and competitiveness.

But the budget has several key policy challenges ahead of Budget 2026-27.

Despite positive trends, the survey lays out several policy challenges that the Union Budget must address:

External vulnerabilities and export competitiveness:

The persistence of global headwinds — trade fragmentation, geopolitical risk, and volatile capital — demands a concerted shift towards broad-based merchandise exports and deeper integration into global value chains. Budget measures will need to support export competitiveness through targeted incentives, logistics reforms, and trade facilitation.

It is also essential to reform the tax treatment of debt instruments and expand non-bank financial channels to lower the cost of capital. This would unlock investment — particularly in infrastructure and technology — and reduce over-dependence on bank credit.

With state revenue deficits rising, the Budget needs a framework that balances state autonomy with fiscal responsibility. Encouraging productive capital spending while limiting unproductive transfers remains essential for medium-term debt sustainability.

India’s demographic dividend can only be realised through sustained investment in education, health, and skills — especially in underserved regions. Allocations that bridge human development gaps will be vital to unlock long-term productive potential.

A resilient growth path must also align with climate imperatives. Energy transition, sustainable agriculture, and green finance will require budgetary support — both in direct spending and fiscal incentives — to ensure that climate goals are embedded in economic strategy. The rapid expansion in renewables and clean energy capacity needs further policy backing.

Hopefully, the government will balance ambition with realism and ensure that India transitions from a fast-growing economy to a more resilient, inclusive, and globally integrated one. The Budget must balance short-term demand support with long-term capacity building — ensuring that growth is not only sustained but is also sustainable.

(The author is former Chief Editor of The Hans India)