OPINION Growth roadmap for the budget in an unsettled world

Union Budget

• Economic Survey urges agile policymaking amid global uncertainties
• India's growth forecast for FY27 is 6.8-7.2%, above pre-pandemic average
• States' rising debt and fiscal discipline flagged as key risks

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By Dipti Deshpande and Adhish Verma

The Economic Survey 2025-26 made it amply clear that geopolitical and trade uncertainties which are no longer temporal but structural, necessitate nimble and adaptive policymaking to guide economic growth. Both the government and the private sector will have to embrace this approach.

The survey presents three possible global scenarios for the year, rather than treating global risk as a generic downside risk. This approach is intended to enable stakeholders—policymakers, households, corporates and even foreign investors—better assess the changing nature of global risks and their possible implications for the Indian economy.

Growth rate remains above pre-pandemic decadal average

On the domestic front, the survey underlined the resilience of the Indian economy in the current fiscal, while acknowledging that growth is likely to moderate in fiscal 2027 to 6.8-7.2%. This is lower than the National Statistical Office’s estimate of 7.4% for fiscal 2026, but still above the pre-pandemic decadal average growth rate of 6.6%. This trajectory aligns with our growth forecast of 6.7% for next fiscal.

Enhancement in potential growth rate

Encouragingly, the survey said structural reforms undertaken in recent years, alongside an improvement in macro-financial fundamentals, have begun to strengthen the economy’s productive capacity. As a result, India’s potential growth is now assessed at ~7% compared with 6.5% in fiscal 2023. This is significant, as achieving the government’s vision of Viksit Bharat, by 2047 will require faster growth over a prolonged period.

Contribution of different factors of production

The survey employed the standard growth accounting framework to assess the contributions of labour, capital and productivity to growth. It expects capital accumulation (or investment) and productivity (or efficiency gains) to rise and revert to their pre-pandemic growth trend, while labour will punch in higher growth than in the pre-pandemic period.

Labour’s contribution is seen improving both in scale and quality over time, driven by the impact of labour law reforms, increased formalisation and the government’s intended focus on education and skilling. However, effective implementation of the proposed labour codes will be critical and progress in narrowing the skill deficit will need close monitoring.

Capital will continue to be the dominant growth driver, consistent with our medium-term outlook, supported by the gradual crowding in of private investment facilitated among other factors, by sustained public investment.

The survey highlighted the role the third factor—efficiency gains—would play in lifting growth potential. We believe efficiency will play a slightly larger role than in the past and be the second-largest contributor to growth after capital. These gains will reflect stronger synergies between labour and capital, enabled by technological adoption, infrastructure build-up and rapid digitalisation. Historical evidence clearly shows that periods of high growth have coincided with rising productivity.

Challenges in sustaining capital inflows

On the cautionary side, the survey acknowledged that sustaining foreign capital inflows in an uncertain geopolitical environment and the resulting pressure on the rupee could remain a persistent challenge. While India’s improved macro fundamentals and reduced external account vulnerability provide buffers, the rising intensity of shocks could test these strengths.

While global shocks are beyond domestic control, the creation of appropriate policy and macro guardrails remains within reach.

In this context, the macro house has been brought in order. Further strengthening, as the survey advocates, can improve the country’s current account position by boosting export revenue. Importantly, the survey emphasised that while India’s services exports have performed well and provided a much-needed buffer, enhancing competitiveness in manufacturing exports alongside complementary services is critical for durable currency strength.

States’ debt trajectory is a problem

Another risk highlighted by the survey is the weakening fiscal discipline at the state level. The current fiscal saw a surge in state development loan (SDL) borrowings which pushed up the long-term bond yields despite policy rate cuts by the central bank.

A key concern on state finances is the sharp rise in unconditional cash transfers by states. While such transfers could provide a temporary consumption boost, they are also somewhat responsible for stalling the debt correction path for states.

The responsibility of states in debt management cannot be overlooked, particularly because their combined debt is about half of the Centre’s. The Centre has been bringing down its debt on a continual basis, whereas after interim correction, states’ debt has risen since fiscal 2025. The RBI estimates the combined debt of state governments to rise to 29.2% in fiscal 2026 from 28.4% in the previous year.

Despite the Indian economy’s demonstrated resilience, the road ahead is fraught with challenges. The survey urged the government to not only sustain its reform momentum but also ensure effective implementation. Crucially, it emphasised the need for agility in policymaking as legacy frameworks may no longer suffice in a rapidly evolving global environment.