Expectations vs. Reality of 2025: A Macroeconomic Paradox
The year 2025 presented a paradox: India achieved its strongest macroeconomic performance in decades, yet global conditions became increasingly hostile.
- Domestic Strength:
- Growth & Reform: Real GDP is being anticipated at over 7% driven by structural reforms like the GST overhaul, labour code notification, and opening of nuclear power to private sector and insurance to FDI.
- Fiscal Prudence: The fiscal deficit was contained at 4.8% of GDP (bettering the 4.9% target), with a glide path set for 4.4% in FY26.
- Credit Ratings: India received upgrades from three major agencies (S&P upgraded India to BBB, the first major upgrade in two decades).
- Monetary Easing: The RBI cut rates aggressively as inflation moderated and liquidity conditions loosened.
- Global Headwinds:
Three Global Scenarios for 2026The Survey outlines three possible global trajectories, all of which pose risks to capital flows and currency stability:
India's Strategy: India must run a "marathon as a sprint"—prioritising shock absorption (buffers/reserves) while maximizing domestic growth. |
- Trade Wars: Unexpected penal tariffs from the US disrupted trade expectations.
- Security environment being deteriorated. E.g. in Eastern Europe
- Unpredictable financial environment. E.g. security driven trade policy, sudden rise of gold prices etc.
- Strategic Power Gap: The Lowy Institute's Power Gap Index notes India is operating below its strategic potential (score of -4.0), necessitating a push for greater influence.
Key Themes & Sectoral Insights
Fiscal Policy: The General Government Challenge
- Issue: While the Centre is consolidating, States represent a risk. Rising revenue deficits and unconditional cash transfers at the State level are crowding out capital expenditure.
- Impact: Weak state fiscal discipline keeps India's sovereign borrowing costs high (e.g., India's 10-year bond yield is 6.7% vs. Indonesia's 6.3%, despite similar ratings).
Cost of Capital & External Balance
- Structural Constraint: India's high cost of capital is a result of persistent Current Account Deficits (CAD). Reliance on foreign savings demands a "risk premium."
- Solution: To durably lower capital costs, India must transform into a surplus-generating economy through exports and financial depth.
- Apart from cost of capital, energy cost is equally important for Indian businesses grappling with high input costs. Net zero transition may exacerbate this inversion.
Manufacturing vs. Services
- Services Limitation: While services exports outpaced merchandise, services alone cannot compel state capacity upgrades, durable currency or absorb mass labour like manufacturing.
- Manufacturing Imperative: Strong currency stability is historically linked to manufacturing excellence (East Asian model).
- India's recent trade agreements bear testimony to the efforts in this direction.
- Strategic Autonomy: The Survey argues against high protectionism for upstream sectors (e.g., steel, fibre), as this acts as a tax on downstream export competitiveness (as raw material become costlier).
The Entrepreneurial State
- Definition: Not commercialisation of state or privileging private interest, but a state capable of decision-making under uncertainty. Moving from "regulation and control" to "enabling."
- India's initiative towards such a state: Mission-mode platforms (Semiconductors, Green Hydrogen), innovative public procurement to enable domestic innovation, and trust-based compliance reforms instead of inspection based control in States.
- Goal: Building state capacity is the binding constraint for India's next leap.
Way Forward: Shreya vs. Preya
The Preface concludes with a philosophical call to action referencing the Katha Upanishad. India must choose Shreya (the enduring good/long-term reform) over Preya (fleeting comfort/short-term populism). Economic survey also calls for adopting ''Strategic Sobriety". The focus must be on building resilience, innovation, and staying the course toward Viksit Bharat, avoiding quick fixes to short-term pressures.
