India’s growth story looks strong, but the global economy will test its limits

By: Team India Tracker

The Economic Survey is blunt: strong macro fundamentals offer no immunity. External shocks tend to hit the balance of payments first, before spilling over into the currency

The Economic Survey 2025-26 marks a quiet but significant shift in how the Indian state views growth, risk and its place in a fractured global economy. Prepared under Chief Economic Advisor V Anantha Nageswaran, the document is broader in scope, more candid about global shocks, and clearer about the limits of India’s current economic model than recent editions. 

That redesign is not accidental. The Survey openly acknowledges that the global environment has become more uncertain than at any point since the pandemic. Trade is no longer neutral, capital flows are shaped by geopolitics, and supply chains are now instruments of state power. Medium-term outcomes, it says, will depend less on domestic intent and more on how these global stresses unfold. 

Against this backdrop, India’s near-term performance looks reassuring. Growth in FY26 is projected at 7.4 per cent, sharply higher than the 6.3–6.8 per cent range forecast a year ago. The Survey also upgrades India’s medium-term potential growth rate to 7 per cent, up from 6.5 per cent three years ago, reflecting the cumulative impact of reforms and a sustained push in public capital expenditure. 

For FY27, growth is expected to moderate slightly to a 6.8–7.2 per cent range. That is not a slowdown in substance, the Survey argues, but a return to trend as the base effect fades. The larger point is that India has expanded its productive capacity— roads, ports, logistics, power and digital infrastructure—in a way that supports higher long-term growth. 

Yet the document is careful not to confuse strength with insulation. India remains vulnerable to global shocks because it runs a current account deficit and depends on foreign capital. This vulnerability has already shown up in the rupee, which has faced pressure in recent months amid foreign portfolio investor outflows from Indian equities. 

The Survey notes bluntly that strong macroeconomic fundamentals do not guarantee protection. External shocks will hit the balance of payments first and spill over into the currency. For a country that must attract global savings, investor confidence and export earnings are not optional—they are macroeconomic necessities. 

Two policy conclusions follow. 

First, India must reduce the cost of capital. The Survey argues that when upstream inputs are capital-intensive, lowering financing costs is more efficient than raising import tariffs. But this requires fiscal discipline. While the Centre has consolidated its deficit while raising capital expenditure, several states have loosened fiscal controls. In an era where global capital is scarcer and more expensive, India’s fiscal rules must reflect its financing capacity, not political convenience. 

Second, India must reduce import protection and rethink self-reliance. The Survey reframes the swadeshi debate entirely. The question is no longer whether swadeshi should be pursued, but how it can be done without sacrificing efficiency, innovation and global integration. 

In today’s world, the Survey argues, trade is not reciprocal and markets are not neutral. In such an environment, swadeshi is a legitimate policy tool. But defensive self-reliance will not work. India must aim to become a systemically important node in global supply chains — moving from resilience to indispensability. 

This requires a shift in industrial strategy. The Survey is clear that the next phase of industrialisation cannot rely on import substitution alone. It must focus on scale, competitiveness and innovation. Rather than trying to be self-sufficient in every segment, India needs depth of capability across critical sectors. 

Manufacturing sits at the heart of this argument. Services exports have powered India’s external earnings, but they do not force broad institutional upgrades because firms can often bypass domestic bottlenecks. Manufacturing, by contrast, imposes fiscal, logistical and employment pressures that compel improvements in state capacity. 

The India–EU free trade agreement is cited as an example. It expands market access for labour-intensive exports and links India more deeply with European manufacturing and technology ecosystems. But market access alone will not deliver gains unless domestic production becomes competitive. 

The Survey is unsparing about global risks. A correction in asset prices—especially if the AI-driven productivity boom fails to materialise — could trigger contagion. Prolonged trade conflicts would hurt investment and exports. For India, these risks would show up through weaker external demand, tariff disruptions and volatile capital flows. 

Still, the tone is not pessimistic. Domestic demand remains strong, reforms in GST, deregulation and compliance have progressed, and FY27 is expected to be a year of adjustment as firms respond to these changes. 

Perhaps the most candid assessment is of state capacity. India’s constraint, the Survey argues, is no longer ideas or resources but institutional incentives — bureaucratic risk aversion, weak regulation and a private sector too comfortable with protection. 

India’s long-term challenge is to become a surplus-generating economy, with higher productivity, stronger exports and deeper financial markets. Only then will its cost of capital fall durably. 

The Survey’s message is clear: India is growing well, but growth alone is not enough. The task now is to build capabilities that make the economy indispensable to the world—a marathon that must be run with the urgency of a sprint.