OPINION | Economic Survey shines the light on growth in times of external uncertainty 

India’s GDP growth likely to ease to 6.7%.

For anyone tracking the world economy, ‘uncertainty’ is likely to have been the most used word in their lexicon in 2025, and this is unlikely to be dethroned in 2026. This is echoed in the Economic Survey 2025-26, with the word being mentioned 186 times in the document.

The Chief Economic Adviser (CEA) highlights three global scenarios for 2026. The best of these assumes ‘business as in 2025’ with episodes of financial stress, trade frictions and geopolitical tensions creating volatility and warranting

increased government interventions. The worst of these assumes the risk of a systemic cascade wherein financial, technological and geopolitical stresses coincide, leading to worse macroeconomic consequences than those of the 2008 crisis.   

Call for policy focus on consumption and investment

These scenarios are not very encouraging and would have an adverse bearing on India’s growth outcomes primarily via the financial markets and exports channel. This would warrant a doubling down of policy focus on improving domestic consumption and investments, while simultaneously enhancing macroeconomic stability and buffers. The upcoming Union Budget must take cues from this assessment.

GDP may be lower than Survey’s’ projection

ICRA expects India’s GDP growth to ease to 6.7% in FY2027 from the 7.4% expected in 2026, while remaining quite robust. The income tax rationalization, GST rate cuts, low inflation and 125 bps of policy rate cuts are expected to continue to support domestic consumption, even as export outcomes are likely to remain tepid. Our estimate of GDP growth for next year, is slightly below the lower bound of the range of 6.8%-7.2% pegged in the Economic Survey.

Inflation too is expected to remain at manageable levels. While we expect it to double to 4.0% in FY2027 from the 2.0% expected in FY2026, this would come in at the mid-point of the MPC’s medium term target range. A moderate inflation would augur well for nominal GDP growth in the next fiscal, which is expected to remain sub-10% in FY2026, notwithstanding the strong growth in real GDP.

Two key changes ahead

Two pivotal changes are on the anvil in the upcoming Union Budget. The first is the shift in the fiscal anchor to medium-term debt-to-GDP, which would anchor expectations around the Government of India’s (GoI) borrowings and ensure that the debt consolidation seen in the post Covid period continues.

The second big change could stem from the implementation of the recommendations of the 16th Finance Commission for the next five years (FY2027-2031). This could lead to a change in distribution of resources between the GoI and the states. These changes will influence the fiscal space available for the GoI and the states and may nudge a reassessment of their spending priorities.

Quality of states’ expenditure is important

The Survey acknowledges these changes. Simultaneously, it stresses the need for continued calibration in state-level debt and deficits, highlighting that any fiscal indiscipline at the state level also impacts sovereign borrowing costs. It adds that persistent revenue deficits or an expansion of committed expenditures at the State level could affect sovereign bond yields; with state governments’ borrowings being capped, our view is that it is the quality of expenditure which is a bigger issue than the size of borrowings being undertaken.

Besides, while the demand-supply scenario for government securities is typically assessed at the general government level, the RBI’s OMOs largely tend to be in the GoI’s securities. This has been the case in the ongoing fiscal, with OMO purchases to the tune of Rs. 5.7 trillion conducted so far (till January 28), and Rs. 1.0 trillion more scheduled over the next few weeks, as against gross issuances of the GoI at Rs. 14.6 trillion in FY2026.

The Survey also endorses the role of the Special Assistance to States for Capital Investment or the capex loan scheme in protecting growth-oriented spending of the states. It highlights that the capital expenditure by the States has increased from 2.2% of GDP in FY2022 to 2.4% in FY2025. We believe that the GoI must enhance the allocation for this scheme materially in FY2027 from the Rs. 1.5 trillion budgeted in FY2026, which would play an important role in supporting public infrastructure investment in the fiscal.

Keeping the uncertain external environment in mind, we expect the GoI to restrict its fiscal deficit to 4.3% in FY2027, while enhancing capex. Besides, the borrowing number needs to be contained to ensure that G-sec yields do not come under further stress. This would be important to compliment the monetary easing seen in FY2026, and to keep the borrowing costs in the economy in check.

(Aditi Nayar, Chief Economist, Head- Research & Outreach, ICRA.)

Views are personal and do not represent the stand of this publication.