In 2025, “uncertainty” was probably the most frequently used word in the vocabulary of anyone following the global economy, and it seems unlikely that this will change in 2026.
Economic Survey Highlights and Global Scenarios
The word appears 186 times in the Economic Survey 2025–2026, which is consistent with this.
For 2026, the Chief Economic Advisor (CEA) outlines three worldwide possibilities. The best of these presupposes “business as in 2025,” with periods of economic strain, trade disputes, and geopolitical unrest causing instability and necessitating further government involvement.
Worst-Case Scenario and Its Implications
The worst of these assumes the danger of a systemic cascade in which geopolitical, technical, and financial strains intersect, resulting in macroeconomic outcomes worse than those of the 2008 crisis.
These scenarios are not particularly promising and would negatively impact India’s growth prospects, mainly through the export and financial sectors. This would necessitate stepping up policy efforts to boost domestic investment and demand while also strengthening macroeconomic stability and buffers. This assessment must serve as a guide for the next Union Budget.
GDP Growth and Inflation Forecast
According to ICRA, India’s GDP growth would continue to be strong but will slow to 6.7% in FY2027 from 7.4% in 2026. Even if export results are probably going to stay muted, domestic consumption is anticipated to continue to be supported by the income tax rationalization, GST rate reductions, low inflation, and 125 basis points of policy rate cuts. Our projected GDP growth for the upcoming year is somewhat lower than the Economic Survey’s 6.8%–7.2% lower bound.
It is also anticipated that inflation will stay within reasonable bounds. Although we anticipate that it will increase from 2.0% in FY2026 to 4.0% in FY2027, this would fall in the middle of the MPC’s medium-term target range. Despite the robust growth in real GDP, nominal GDP growth is predicted to stay below 10% in FY2026 if inflation is mild.
Union Budget FY2027 Adjustments
The next Union Budget will include two significant adjustments. The first is the change in the fiscal anchor to medium-term debt-to-GDP, which would guarantee that the debt contraction observed in the post-Covid era continues and anchor expectations around the Government of India’s (GoI) borrowings.
The adoption of the 16th Finance Commission’s proposals over the following five years (FY2027-2031) may result in the second significant shift. The allocation of resources between the states and the GoI may alter as a result. The GoI and the states will have less financial room as a result of these adjustments, which may force them to reevaluate their expenditure priorities.
State-Level Debt and Fiscal Management
The Survey recognizes these modifications. It also emphasizes the necessity of ongoing calibration of state-level debt and deficits, emphasizing that state fiscal indiscipline affects sovereign borrowing costs. Sovereign bond yields may be impacted by ongoing revenue deficits or an increase in state-level committed expenditures. Since state governments’ borrowing is limited, we believe that the quality of spending is more important than the amount of borrowing being done.
Furthermore, the RBI’s OMOs are usually in the securities of the GoI, even though the demand-supply picture for government securities is usually evaluated at the general government level.
In contrast to the GoI’s gross issuances of Rs. 14.6 trillion in FY2026, OMO purchases totaling Rs. 5.7 trillion have been made thus far (through January 28) and an additional Rs. 1.0 trillion are planned during the next weeks.
🏗️ Public Infrastructure & State Capital Spending
- State Capex Growth: Increased from 2.2% of GDP in FY2022 to 2.4% in FY2025
- GoI Plan: Allocation for FY2027 expected to rise above Rs. 1.5 trillion
- Goal: Encourage public infrastructure investment and safeguard growth-oriented expenditures
Additionally, the survey supports the role of the capex loan program or Special Assistance to States for Capital Investment in safeguarding the states’ growth-oriented expenditures. It emphasizes how state capital expenditures rose from 2.2% of GDP in FY2022 to 2.4% in FY2025.
In order to encourage public infrastructure investment in the fiscal year, we think the GoI should significantly increase the allocation for this plan in FY2027 from the Rs. 1.5 trillion projected in FY2026.
Fiscal Deficit and Borrowing Strategy
We anticipate that the GoI will increase capital expenditures while limiting its fiscal deficit to 4.3% in FY2027 in light of the unpredictable external environment. In addition, in order to prevent additional strain on G-sec yields, the borrowing number must be limited. This would be crucial to support the monetary easing that occurred in FY2026 and to control the cost of borrowing in the economy.
Risks to the World Economy and Their Effect on India
Although India’s growth is still robust, foreign threats may have an impact on investment and exports:
Volatility in the financial markets:
Could affect investment flows and increase borrowing costs.
Tensions in geopolitics:
Sanctions or trade disruptions could impede the growth of exports.
Shocks from technology:
Manufacturing and IT exports may be impacted by supply chain interruptions or cybersecurity vulnerabilities.
To reduce these risks, the policy response will prioritize infrastructure investment, fiscal restraint, and domestic demand.
Sector-Specific Growth Prospects
1. IT (information technology):
Uncertainty across the world may cause exports to halt, but robust domestic digital usage promotes prosperity. Revenue is anticipated to be driven by emerging tech sectors like fintech, cloud computing, and artificial intelligence.
2. Production:
Supported by growing domestic demand, PLI programs, and government incentives under the Make in India initiative. Issues with the global supply chain could affect some export-oriented industries.
3. Farming:
An industry that depends on the monsoon is still at risk from climate change. Growth will be maintained by government programs including irrigation projects, MSP support, and the adoption of agri-technology.
💰 Fiscal Deficit & Borrowing Management
- Fiscal Deficit: Targeted at 4.3% in FY2027
- Borrowing: Carefully controlled to keep G-sec yields stable
- Objective: Support growth while maintaining macroeconomic stability
Fiscal Performance at the State Level
States are crucial to general development. Highlights of the Economic Survey:
Prioritizing quality over quantity
Although borrowing is limited, productive spending must be the main priority.
An increase in capital expenditures
From 2.2% of GDP in FY2022 to 2.4% in FY2025, states’ capital expenditures increased.
Budgetary restraint:
Maintains general macroeconomic stability by preventing state deficits from raising the cost of borrowing for sovereigns.
Encouraging Development in the Face of External Uncertainty
Expectations for the government are:
- In FY2027, keep the fiscal deficit at 4.3%.
- Boost capital spending
- Control borrowing carefully to keep G-sec yields stable.
- Bolster public infrastructure and raise the standard of spending
Frequently Asked Questions
1. In the face of global uncertainties, what is India’s growth outlook?
According to the survey, there will be a lot of global uncertainty in 2025 and 2026, including trade disputes, financial strain, and geopolitical threats. Although these can have an impact on financial markets and exports, India’s domestic investment and consumption are anticipated to maintain strong growth.
2. What is the forecast for GDP growth in FY2027?
GDP growth is predicted to drop from 7.4% in 2026 to 6.7%. Even if exports do not perform well, domestic consumption—which is bolstered by income tax rationalization, GST reductions, low inflation, and interest rate reductions—will assist sustain overall growth.
3. What is the anticipated behavior of inflation?
According to projections, inflation will increase from 2.0% in FY2026 to 4.0% in FY2027. This supports nominal GDP growth without causing price instability, and it is moderate and falls within the RBI’s medium-term aim.
4. What budgetary adjustments may we anticipate in the Union Budget FY2027?
Important anticipated actions consist of: a change to a medium-term debt-to-GDP anchor that will continue post-COVID debt consolidation and direct government borrowing; implementation of the recommendations of the 16th Finance Commission, which could alter the distribution of resources between the federal government and the states and impact fiscal objectives. Additionally, the Survey highlights increasing capital expenditure through programs like Special Assistance to States for Capex and maintaining budgetary restraint at the state level.
5. In the face of external uncertainties, how will growth be sustained?
To keep G-sec yields steady, the government is anticipated to keep the fiscal deficit at 4.3%, increase capital spending, and closely control borrowing. Growth will be sustained by increasing public infrastructure expenditures and raising the standard of spending.
Conclusion
Cautious optimism is shown in the Economic Survey 2025–2026. India’s solid development is anticipated due to its strong domestic consumption, investments, and fiscal discipline, even though global uncertainty may have an impact on financial markets and exports.
In order to help India manage external threats and promote steady development, the forthcoming Union Budget will probably concentrate on increasing capital investment, upholding fiscal conservatism, and guaranteeing stable borrowing prices.
Disclaimer: This content is for informational purposes only and does not constitute financial or investment advice. Readers should consult a qualified professional before making financial decisions.
