UPGRADING THE economy’s potential growth rate to 7 per cent from 6.5 per cent three years ago, the Economic Survey for 2025-26 said the country is projected to grow by 6.8-7.2 per cent in the next financial year.
Everything looks good — from growth, inflation, credit growth to rainfall, agri, and corporate balance sheets, it said. But what is causing some concern to Chief Economic Advisor V Anantha Nageswaran, the principal author of the Survey, is the global capital strike, and its adverse impact on rupee’s stability, despite strong macroeconomic fundamentals. The rupee, he said, is “punching below its weight”.
In the preface to the 687-page Economic Survey, the CEA describes India as “a victim of geopolitics”, adding that the rupee’s valuation does not accurately reflect India’s “stellar economic fundamentals”, which causes investors to pause. While an undervalued rupee helps offset the impact of higher US tariffs, the investor reluctance to commit to India warrants examination, he notes.
Citing the rupee — which has weakened by almost 7 per cent since the start of 2025 against the US dollar and nearly touched the 92-per-dollar mark Thursday — as an example, Nageswaran said since India runs a merchandise trade deficit that is not fully cancelled out by the services trade surplus and inward remittances, it depends on foreign capital flows to maintain a healthy balance of payments. “When they run drier, rupee stability becomes a casualty,” he said.
The paradox of 2025 has been 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”, he said. Citing data from the Australia-based Lowy Institute’s Power Gap Index, the Survey said it suggests India is operating below its full strategic potential with its power gap score at -4.0, the lowest in Asia, excluding Russia and North Korea.
Reforms, need for buffers
Dependent on global capital flows, India has to plan for liquidity and external capital buffers in the coming year, the Survey said. The negative effects of the ongoing global political and economic turmoil may manifest with a lag, and India runs the risk of contraction in liquidity, disruption of capital flows, and a consequent impact on the rupee.
Capital flight, including with the advent of the US stablecoins, is another risk to watch out for.
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Therefore, proactive reforms are essential to attract more foreign investment. India also needs to generate sufficient investor interest and export earnings in foreign currency to cover its rising import bill. Regardless of the success of indigenisation efforts, rising imports will invariably accompany rising incomes, it said. “India must run a marathon and sprint simultaneously, or run a marathon as if it were a sprint,” the CEA said.
For the coming year, the Survey detailed three possible scenarios of global crises — ‘business as in 2025’, disorderly multipolar breakdown, and a systemic shock cascade in which financial, technological, and geopolitical stresses amplify one another rather than unfolding independently. Out of these three case scenarios, the common risks for India will be “disruption of capital flows” and the “consequent impact on the rupee”. “Only the degree and the duration will vary,” it said.
Stating the high cost of capital as a structural macroeconomic outcome, the Survey said the country’s long-run challenge is not merely to manage liquidity or credit cycles, but to transform itself into a surplus-generating economy. “Only then can its cost of capital fall durably,” it said.
A country that persistently runs current account deficits and depends on foreign savings must, by definition, pay a risk premium to global capital. In contrast, economies that generate sustained external surpluses — through exports, productivity and financial depth — can finance investment cheaply and stably at home, it said.
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Noting that the FDI (foreign direct investment) inflows remain below their potential, especially for infrastructure needs, despite a clear government intent and proven economic management, the Survey listed several cross-country examples of tax holidays, customs exemptions, investment missions, tailor-made tax incentives, low-interest loans, visa concessions, R&D tax incentives, project approvals with interventions at the PM level in the emerging FDI destinations of Vietnam, Thailand, Malaysia, Taiwan, and Australia as FDI attracting measures.
Creating a task force to engage top global companies and promote India’s advantages — stability, macroeconomic strength, sustained growth and market size — could boost FDI, especially in targeted sectors, it said.
Challenging period, and a year of adjustment
Terming 2025-26 as an “unusually challenging year” for the economy on the external front due to the elevated global trade uncertainty and the high tariffs which affected business confidence, the Survey said the government had used the crisis as an opportunity to push through key measures such as the rationalisation of the Goods and Services Tax (GST) and faster progress on deregulation, among others. Indiscriminate Quality Control Orders, which adversely affected downstream industries, were put on hold, it said.
“FY27 is therefore expected to be a year of adjustment, as firms and households adapt to these changes, with domestic demand and investment gaining strength,” the Survey said.
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Manufacturing competitiveness and exports are important for maintaining long-term currency stability and strength, it said, highlighting that manufacturing has to take on a far greater strategic dimension when the security of supply of essential and infrastructure goods is no longer assured. However, this has to be balanced against the risk that high protection in upstream sectors (for example, textile fibre, steel and aluminium) raises costs for a much larger set of firms engaged in export-oriented production, it said.
The cumulative impact of policy reforms over recent years appears to have lifted the economy’s medium-term growth potential closer to 7 per cent, the Survey said. “With domestic drivers playing a dominant role and macroeconomic stability well anchored, the balance of risks around growth remains broadly even. Taking these considerations together, the Economic Survey projects real GDP growth in FY27 in the range of 6.8-7.2 per cent. The outlook, therefore, is one of steady growth amid global uncertainty, requiring caution, but not pessimism,” it said.
According to the statistics ministry’s First Advance Estimate of GDP for the current fiscal, growth is seen at 7.4%.
Fiscal populism by states
The Survey flagged concerns about fiscal populism, the crowding out of capital expenditure by cash transfers, and the rise of revenue deficits in states, with revenue surplus states reducing in number from 19 in FY19 to 11 in FY25. While the Centre has achieved consolidation alongside record public investment, rising revenue deficits and unconditional cash transfers in several states pose as emerging risks by crowding out growth-enhancing spending. “With Indian government bonds now globally indexed and investors increasingly assessing general-government finances, weak fiscal discipline at the State level can no longer be treated as locally contained — it increasingly affects the cost of sovereign borrowing,” the Survey said.
