According to the Economic Survey 2025-26, India leveraged the global window of “fragile stability” to overhaul its domestic economy through key reforms, including GST rationalisation, accelerated deregulation and streamlined compliance requirements.
The Indian economy faced several external pressures in 2025, as escalating global trade uncertainty and punitive tariffs strained manufacturers and exporters while eroding business confidence across multiple sectors. However, the Survey notes that FY27 is expected to be a “year of adjustment” with firms and households adapting to the new policy landscape as domestic demand and investment gather momentum. While the medium-term global outlook remains subdued, with downside risks predominating, global growth is expected to stay modest and inflation trending downwards.
The Survey however cautions that should the AI boom fail to deliver anticipated productivity gains, it could burst inflated asset prices and lead to financial instability across markets. While protracted trade wars threaten to stifle global investment and dampen growth, the impact on India is expected to manifest as manageable external uncertainty rather than immediate macroeconomic distress. Slower growth among key trading partners, tariff-induced trade disruptions, and volatile capital flows could, however, periodically weigh on exports and investor sentiment. Moreover, ongoing trade negotiations with the US could help reduce external uncertainty if successful.
As the Survey lauds India’s robust domestic fundamentals, here are the key takeaways:
India saw one of the steepest inflation declines among major emerging markets and developing economies, with headline inflation falling by approximately 1.8 percentage points. While CPI has cooled significantly, dropping to 1.7 percent in 2025-26, fuelled by a slump in food prices specifically vegetables, pulses and spices, core inflation appeared “sticky” largely due to high gold and silver prices.
However, the Survey notes a clear “rural-urban divide” in inflation as it remains more volatile in rural areas because food makes up a larger portion of their spending. Despite this, most states have successfully brought inflation back within the Reserve Bank of India’s tolerance band.
The Survey also advocates for a pragmatic “India-first” AI strategy that prioritises domestic economic realities over the capital-intensive models favoured by advanced economies. For a labour-abundant economy like India, the primary risk of AI is the potential for labour substitution, particularly in low-value-added service segments. Uncalibrated deployment could displace workforces faster than the economy can reabsorb them.
However, the Survey also acknowledges challenges—$3.9 billion in portfolio outflows, a $6.4 billion balance of payments deficit, and 6.5 percent rupee depreciation. It also emphasises robust fundamentals: 16.1 percent FDI growth, forex reserves covering 11 months of imports, and new trade agreements with the UK, Oman and New Zealand demonstrating diversification efforts that position India to weather global headwinds.
The Survey says that reforms like GST 2.0 and personal income tax simplification aim to broaden the tax base and slash compliance costs. Supported by advanced digital administration, these measures will enhance transparency, improve expenditure efficiency and ensure a steady glide path toward debt reduction and long-term macroeconomic stability.
However, the Survey also warns of a growing “fiscal trade-off” at the state level. The rapid expansion of unconditional cash transfers risks creating “expenditure rigidity”, potentially crowding out essential investments in human capital and infrastructure. This could also impact sovereign borrowing costs.
Read Forbes India's complete Budget 2026-27 coverage here
First Published: Jan 29, 2026, 17:33
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