Caught in a fractured world: What Economic Survey says about India’s risks amid US-China tensions

A pedestrian walks past an art installation highlighting various Indian currency denominations and the rupee logo outside the Reserve Bank of India (RBI) headquarters in Mumbai on June 6, 2025. (Photo by Indranil MUKHERJEE / AFP)

India’s Economic Survey 2025–26 warns that strong growth won’t shield the country from global shocks amid US–China rivalry. It urges urgent reforms, manufacturing focus, and strategic trade deals to boost resilience in a fragmented, risk-prone world.

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As geopolitical fault lines deepen between the United States and China, the Economic Survey 2025–26 offers a clear-eyed assessment of the risks facing India in an increasingly fragmented global order. The Survey warns that strong macroeconomic performance alone will not shield India from global shocks driven by strategic rivalry, coercive trade policies, and capital flow disruptions.

Despite India recording one of its strongest growth phases in decades, the Survey notes that “India’s strongest macroeconomic performance in decades has collided with a global system that no longer rewards macroeconomic success with currency stability, capital inflows, or strategic insulation.”

The warning is explicit. In a world where trade and finance are shaped by security considerations rather than efficiency, India cannot afford incrementalism or delayed reforms.

A global order defined by rivalry and risk

The Survey describes the global environment as structurally unstable. It observes that “trade policy is now shaped primarily by security and political considerations rather than efficiency or multilateral rules.”

This shift has direct consequences for countries like India that depend on exports, capital inflows, and stable financial conditions.

The Survey outlines three global scenarios for 2026, two of which assign a combined probability of up to 90 percent to persistent fragility, disorder, and strategic competition. In the more adverse scenario, it warns that “trade becomes increasingly explicitly coercive, sanctions and counter-measures proliferate, supply chains are realigned under political pressure, and financial stress events are transmitted across borders with fewer buffers.”

Why India remains exposed despite strong growth

While India is relatively better positioned than many economies, the Survey stresses that resilience does not mean immunity. “India is relatively better off than most other countries due to its strong macroeconomic fundamentals, but this does not guarantee insulation,” it states.

A key vulnerability lies in India’s external accounts. The Survey notes that India runs a persistent goods trade deficit and depends on foreign capital to finance growth. It cautions that “disruption of capital flows and the consequent impact on the rupee” is a common risk across all global scenarios outlined.

This dependence becomes more dangerous as geopolitical rivalry intensifies and global capital grows more risk-averse.

Manufacturing and exports as strategic imperatives

The Survey repeatedly underscores that services exports, while valuable, cannot substitute for a strong manufacturing base. “Currency strength or currency stability during crises has always eluded countries that could not become successful and significant exporters of manufactured goods,” it notes.

While India’s services exports have done “much of the heavy lifting,” the Survey adds that they “do not systematically compel broad upgrades in state capacity” in the way manufacturing does. This has implications not just for growth, but for strategic autonomy in a world shaped by US–China competition.

Trade agreements in a geopolitical context

The Survey situates India’s recent trade agreements, including the India-EU FTA, within this broader strategic landscape. It describes the EU agreement as expanding “market access for India’s labour-intensive manufactured exports while enabling deeper integration with Europe’s technological and manufacturing capabilities.”

Such agreements are framed not merely as commercial tools but as buffers against geopolitical fragmentation and supply chain coercion.

No room for delay

Perhaps the Survey’s most direct caution is against complacency. It states that “the principal strategic risk for India is less about any single external shock and more about a mindset that downplays structural discontinuities.”

In an environment shaped by US–China rivalry, the Survey argues that India must focus on building buffers, reducing input costs, improving state capacity, and becoming globally competitive rather than protected.

Running a marathon at sprint speed

Summing up the challenge, the Survey offers a stark metaphor. India must “run a marathon and sprint simultaneously,” balancing long-term growth with immediate shock absorption in a hostile global environment.

The message is unambiguous. As global rivalry reshapes trade, finance, and power, India cannot afford to play catch-up. Structural readiness, export competitiveness, and institutional capability are no longer optional. They are strategic necessities.