India’s economy has entered an unusual and potentially precarious phase. Strong growth, disciplined macroeconomic management and improving domestic fundamentals are no longer sufficient to guarantee external stability. That is the central warning of the Economic Survey 2025-26, which argues that the global economic order is undergoing a structural shift that increasingly penalises openness, success and dependence on foreign capital.
Presented in Parliament by Finance Minister Nirmala Sitharaman and authored by Chief Economic Adviser V. Anantha Nageswaran, the Survey projects that India is well placed to sustain real GDP growth of over 7 per cent in FY26 and FY27. Public capital expenditure, healthier corporate and banking balance sheets, contained core inflation and a more resilient financial system underpin this optimism.
Yet the Survey’s message is deliberately sobering. India’s strongest economic performance in decades is unfolding in a world where the rules of global integration are fraying. Geopolitical fragmentation, coercive trade practices, sanctions, volatile capital flows and strategic rivalries are reshaping incentives and risks for fast-growing emerging economies. In this environment, growth and prudence no longer offer insulation.
Strong Growth, Weaker Insulation
The Survey argues that the global economy has moved away from a rules-based system towards one governed by power, alignment and strategic leverage. Under these conditions, macroeconomic orthodoxy does not necessarily protect countries from financial spillovers, currency volatility or sudden stops in capital flows.
This shift, the Survey notes, helps explain a key puzzle of 2025: the disconnect between India’s robust economic fundamentals and the underperformance of the rupee. Despite strong growth, contained inflation and fiscal consolidation, the currency has remained under pressure.
The implication is clear. External vulnerability has become more visible even as domestic fundamentals improve. For India, economic success itself now attracts exposure to global financial volatility rather than shielding against it.
Rupee and External Constraint
The Survey is unequivocal in its diagnosis of the rupee’s weakness. It should not be read as a verdict on domestic economic mismanagement. Instead, it reflects India’s structural dependence on foreign capital inflows to finance its merchandise trade deficit.
Services exports and remittances continue to provide important buffers, but they have not been sufficient to fully offset the external constraint. As a result, India remains sensitive to shifts in global risk appetite, particularly during periods of geopolitical tension, monetary tightening or financial stress.
Crucially, the Survey warns that this vulnerability is not cyclical or temporary. Exchange-rate volatility is likely to persist across cycles, becoming a recurring feature of India’s macroeconomic landscape rather than an aberration linked to isolated shocks.
Fragile and Fragmented Global Outlook
Looking ahead, the Survey outlines three possible global trajectories for 2026. It assigns a high probability, between 80 per cent and 90 per cent, to scenarios marked by instability rather than coordinated recovery.
In the central scenario, global growth continues but remains uneven and fragile. Trade frictions, financial stress and geopolitical shocks repeatedly interrupt expansion, requiring frequent policy interventions. A more adverse scenario envisages intensifying strategic rivalry, expanded use of sanctions and sharper fragmentation of supply chains, amplifying capital flow volatility and economic uncertainty.
The Survey also flags a low-probability but severe downside risk: a cascading global shock combining financial stress linked to leveraged investments in artificial intelligence, geopolitical escalation and liquidity contraction. Such a shock, it warns, could prove more disruptive than the 2008 global financial crisis.
Fiscal Consolidation at the Centre, Risks at the States
On the fiscal front, the Survey credits the Union government with steady progress in consolidation. The Centre met its FY25 fiscal deficit target of 4.8 per cent of GDP and has committed to reducing it further to 4.4 per cent in FY26.
This marks a significant adjustment from the pandemic-era peak of 9.2 per cent in FY21 and has helped restore credibility with investors and rating agencies. India received multiple sovereign rating upgrades in 2025, including a long-awaited upgrade by S&P Global Ratings.
However, the Survey strikes a cautionary note on state government finances. Rising revenue deficits, expanding unconditional cash transfer programmes and fiscal populism at the state level pose emerging risks. As global investors increasingly assess general government finances rather than only the Centre, fiscal slippage by states could raise borrowing costs across the economy.
India’s benchmark 10-year government bond yield, at around 6.7 per cent, remains higher than some similarly rated peers, reflecting these concerns.
Cost of Capital as India’s Binding Constraint
Perhaps the Survey’s most structural argument concerns the cost of capital. India’s relatively high borrowing costs, it argues, are not merely a function of interest rates or inflation expectations. They are rooted in the country’s persistent current account deficit and reliance on foreign savings.
As long as India depends on external capital to finance growth, it will face higher risk premia, currency volatility and sensitivity to global financial conditions. Easing this constraint sustainably requires generating external surpluses through competitive manufacturing exports, not relying predominantly on services.
While services exports have expanded rapidly, with total exports growing at an annual rate of 9.4 per cent since 2020 compared with 6.4 per cent for merchandise exports, the Survey is clear that services alone cannot stabilise the currency or drive large-scale improvements in state capacity, logistics and employment.
Manufacturing, Trade and Selective Openness
Manufacturing, therefore, occupies a strategic place in the Survey’s assessment. Competitive manufacturing exports are presented not only as a growth imperative but as a macroeconomic necessity.
Trade agreements, including the recently concluded India–EU free trade agreement, could support labour-intensive exports, technology integration and scale if accompanied by domestic reforms. However, the Survey warns against protectionist reflexes. Shielding upstream industries through high tariffs raises input costs for exporters, weakens competitiveness and undermines the very objective of self-reliance.
Lowering input costs, improving logistics, scaling micro, small and medium enterprises, and reducing regulatory friction are identified as higher-impact interventions than broad-based protection.
Recasting the Role of the State
Beyond sectoral policy, the Survey calls for a deeper shift in governance philosophy. It advocates an “entrepreneurial state” capable of acting under uncertainty, sharing risk with the private sector and adjusting policy dynamically as conditions evolve.
Mission-mode initiatives in semiconductors and green hydrogen, procurement reforms and deregulation efforts by some states are cited as early signs of this transition. The emphasis is on state capacity, flexibility and execution rather than rigid policy frameworks.
Ultimately, the Survey argues that India’s challenge is no longer accelerating growth alone, but sustaining it in a world where shocks are frequent, alliances are fluid and old economic assumptions no longer hold.
Reframing Swadeshi for a Fractured World
In a parallel but closely linked argument, the Survey reframes the idea of swadeshi for the twenty-first century. It urges India to move beyond narrow import substitution towards a broader strategy of strategic resilience and strategic indispensability.
In a fractured global economy marked by supply-chain weaponisation and trade coercion, self-reliance is no longer about isolation. It is about reducing vulnerabilities while remaining embedded in global value chains.
The Survey draws a clear distinction between post-Independence import substitution and today’s strategic preparedness. The former relied heavily on tariffs and licensing, often at the cost of efficiency and innovation. The latter seeks to identify critical dependencies in areas such as semiconductors, pharmaceuticals, energy, defence, fertilisers and critical minerals, where excessive reliance on external suppliers could threaten economic stability or national security.
The objective is not complete self-sufficiency but diversification, domestic capability building and the ability to withstand shocks.
Strategic Indispensability as the End Goal
Beyond resilience, the Survey introduces the concept of strategic indispensability. India’s long-term aim, it argues, should be to become so deeply embedded in global production networks that disruptions affecting India impose high costs on others.
This requires moving up value chains, building scale in manufacturing and developing technological and process capabilities that are difficult to substitute. In this framework, swadeshi is defined less by exclusion and more by indispensability.
Labour-intensive manufacturing, pharmaceuticals, digital public infrastructure, electronics and clean energy components are identified as areas where India can achieve this status.
Trade Policy with Discipline
The Survey cautions against indiscriminate tariff hikes and prolonged protection. Such measures raise input costs, weaken export competitiveness and ultimately undermine self-reliance.
Instead, it advocates time-bound, performance-linked support, openness to productivity-enhancing imports and disciplined industrial policy. Production-linked incentive schemes are cited as an improvement over past approaches because they reward output and scale rather than mere protection. However, they must remain temporary, transparent and fiscally sustainable.
Without strong monitoring and clear sunset clauses, industrial policy risks degenerating into permanent protection.
States, Execution and Macroeconomic Stability
The success of this redefined swadeshi, the Survey notes, will depend heavily on state governments, which control land, power, logistics and local regulation. Weak state capacity, fiscal populism and policy unpredictability could blunt its effectiveness.
Closer Centre–state coordination, regulatory simplification and sustained investment in logistics and skills are essential to ensure that domestic production is globally competitive, not merely locally protected.
Balancing ambition and restraint
The Survey’s conclusion is deliberately pragmatic. India must shed ideological binaries between protectionism and free trade. Self-reliance is a strategic choice, not a sentimental one.
As globalisation becomes more fragmented and transactional, India’s challenge is to build resilience without sacrificing openness and pursue growth without ignoring the external constraints that increasingly define the global economy.
The task ahead is not simply to grow faster, but to grow wisely in a world that no longer rewards success as it once did.
