India’s growth engine turns inward as global tailwinds fade: Economic Survey

India’s economy remained resilient through a turbulent global year, with growth anchored in domestic demand and public investment, even as the government warned that rising geopolitical risk, trade fragmentation and institutional bottlenecks could weigh on the next phase of expansion.

The Economic Survey tabled in Parliament on Thursday projected real gross domestic product (GDP) growth of 7.4% in FY26, reaffirming India’s position as the fastest-growing major economy for a fourth consecutive year. Growth in the current fiscal year has been supported by a pickup in capital formation, steady urban consumption and continued government spending on infrastructure, according to the survey.

Looking ahead, the government forecast FY27 growth in the range of 6.8% to 7.2%, reflecting a more cautious outlook amid slowing global trade, tighter financial conditions and persistent geopolitical uncertainty.

The survey said India’s medium-term prospects remain strong but warned that external shocks are becoming more frequent and less predictable.

“India is entering a phase where domestic execution matters more than favorable global conditions,” the survey said, pointing to rising protectionism, capital volatility and supply-chain realignments that could limit export-led upside.

Inflation dynamics featured prominently in the assessment, with the survey arguing that headline and core inflation trends are being distorted by sharp increases in gold and silver prices rather than broad-based price pressures.

When precious metals are excluded, core inflation shows a declining trajectory, particularly in the second half of the year, it said. The government cited this as evidence that underlying demand pressures remain contained, even as households face higher costs for select discretionary items.

The survey’s inflation assessment comes as the Reserve Bank of India maintains a cautious policy stance, balancing easing price pressures against global financial risks.

On the external front, the survey acknowledged that India’s goods trade deficit widened sharply, with the merchandise trade gap estimated at $283.5 billion in FY25, up nearly 18% from the previous year. Weak global demand, higher energy imports and limited gains in manufacturing exports continued to weigh on the balance.

That gap has been increasingly offset by services exports, which the survey described as the economy’s primary external stabilizer. Services exports rose to a record $387.5 billion in FY25, generating a services trade surplus of $188.8 billion, enough to cover roughly two-thirds of the merchandise deficit. Software services, business process outsourcing, financial services and consulting continued to drive the expansion.

In the first nine months of FY26, services exports climbed to $304 billion, with the surplus covering just over 60% of the goods deficit, underlining India’s growing reliance on services to finance its trade imbalance.

The survey also offered an unusually frank assessment of the rupee, arguing that the currency does not reflect India’s economic fundamentals and is “punching below its weight.” It said the disconnect between growth performance and currency valuation has become a source of investor unease, particularly in an environment where capital flows are increasingly sensitive to geopolitical alignment and financial stability risks.

Fiscal consolidation remains a central pillar of the government’s macro strategy. The survey reaffirmed the FY26 fiscal deficit target of 4.4% of GDP and said the medium-term framework is shifting toward a debt anchor, with a goal of reducing the Centre’s debt-to-GDP ratio to around 50% by FY31. Central government debt has already declined by more than seven percentage points since the pandemic peak, according to official estimates.

At the same time, the government signalled openness to policy changes aimed at lowering the cost of capital. In comments accompanying the survey, senior officials flagged the need to rationalise taxation on debt instruments to deepen bond markets and reduce reliance on bank lending, a move analysts say could support private investment if carried through in the budget.

Tax collections continued to reflect rising formalisation, with gross GST revenues of ₹17.4 trillion in April–December FY26, up 6.7% from a year earlier. The registered taxpayer base has more than doubled since the rollout of GST in 2017, the survey said. Officials also hinted at the contours of a “GST 2.0,” focused on rate rationalisation and administrative simplification, though no timeline was specified.

Labour market reforms resurfaced as a policy priority, with the survey noting that the four consolidated labour codes were notified in November and are now awaiting full implementation by states. The government argued the new framework would improve worker protection, expand coverage for gig and platform workers, and reduce compliance burdens for employers, though progress has been uneven across regions.

The survey’s section on artificial intelligence struck a notably restrained tone, cautioning against premature regulation and urging a phased approach focused on coordination, capacity-building and sector-specific oversight. It advocated expanding shared digital infrastructure under the IndiaAI Mission and embedding risk-based governance within existing regulators rather than pursuing a single, overarching AI law.

The sharpest critique in the document was reserved for urban governance. The survey warned that Indian cities are being asked to deliver growth and jobs without the fiscal autonomy or institutional authority needed to manage land, housing and infrastructure efficiently. “Infrastructure without institutional reform is concrete without consequence,” it said, arguing that fragmented governance is now a binding constraint on productivity.

Markets reacted cautiously to the survey’s release, with Indian equities paring early losses and government bond yields little changed, as investors looked ahead to the Union Budget for signals on spending priorities and fiscal discipline.

Taken together, the survey paints a picture of an economy that remains structurally strong but increasingly exposed to execution risks. India’s growth story is no longer just about macro stability and scale, the government’s economists argued, but about institutional credibility in a world where capital, trade and technology are becoming more selective.