From Resilience to Results: India’s Economic Test Ahead

As India enters 2026, its economic position appears enviable by emerging market standards. Large foreign exchange reserves, moderate external deficits, improving fiscal discipline and resilient export performance have helped the country navigate global turbulence marked by geopolitical conflict, trade fragmentation and financial volatility. The Economic Survey 2025-26 presents this stability as evidence of policy credibility and institutional maturity. Yet, a closer reading suggests that these strengths are not an end in themselves. Rather, they are buffers that must now be converted into long-term competitiveness.

The survey notes that India’s current account deficit remained contained at 0.8 per cent of GDP in the first half of FY26, reflecting strong services exports and remittance inflows. At the same time, foreign exchange reserves rose to $701.4 billion, covering more than 11 months of imports and nearly 94 per cent of external debt. These numbers signal that India is far better prepared to absorb global shocks than in earlier decades. Such resilience has allowed policymakers to pursue growth-oriented strategies without being constantly constrained by balance-of-payments anxieties.

This external stability has also been reinforced by improved fiscal management. After the pandemic-induced spike, the Union Government reduced the fiscal deficit from 9.2 per cent of GDP in FY21 to 4.8 per cent in FY25, with a target of 4.4 per cent in FY26. This consolidation has strengthened market confidence and limited borrowing costs, creating space for sustained public investment. Together, stable external balances and fiscal credibility have formed the backbone of India’s recent macroeconomic success.

However, stability has come with new complexities. Despite moderate deficits, India’s external position remains sensitive to global financial cycles. Between April and December 2025, foreign portfolio investors withdrew $3.9 billion, reversing earlier inflows. This contributed to a balance of payments deficit of $6.4 billion in H1 FY26 and a 6.5 per cent depreciation of the rupee during the year. The survey warns that geopolitical escalation and trade disruptions could trigger sudden capital reversals.  

These episodes underscore that India continues to finance a portion of its growth through volatile portfolio flows.

This vulnerability becomes more significant in a world where trade and finance are increasingly shaped by strategic rivalry. The survey observes that global commerce is now influenced by “geopolitical alignments and economic statecraft,” weakening the predictability of export markets. Protectionism, immigration controls, and supply-chain realignments threaten both merchandise exports and remittance inflows. While India’s services sector has so far cushioned these shocks, dependence on services alone cannot guarantee long-term stability.

The deeper structural challenge, therefore, lies in manufacturing competitiveness. The Survey argues that sustained export growth requires deeper integration into global value chains, supported by efficient logistics, predictable regulation, and competitive input costs. Yet, high transport expenses, fragmented supply networks, and uneven enforcement continue to limit scale economies. It also acknowledges that advanced manufacturing allows little room for regulatory discretion and demands strict productivity discipline. In effect, industrial success now depends less on incentives and more on institutional performance.

This gap has broader implications for employment. Services-led growth, while profitable, generates fewer mass jobs than manufacturing. India’s labour market remains characterised by high informality and uneven productivity. The Survey estimates that effective implementation of labour reforms could raise formalisation from 60.4 per cent to 75.5 per cent and generate 77 lakh jobs in the medium term. However, progress has been slow, with uneven adoption across states and persistent compliance uncertainties. Without execution coherence, the demographic dividend risks dissipating into low-wage, insecure work.

These pressures intersect with growing concerns over state finances. While central government balances have improved, the Survey warns of fiscal populism, rising revenue deficits, and the crowding out of capital expenditure by cash transfers at the sub-national level. Since states are responsible for much of India’s health, education, and infrastructure spending, fiscal stress at this tier can quietly erode productivity. In poorer regions, development needs coexist with limited borrowing capacity, compounding regional disparities.

Financial markets, too, remain exposed to global turbulence. The survey documents how episodes such as the “taper tantrum” and pandemic volatility triggered capital flight from emerging markets, including India. Although large reserves provide temporary insulation, they cannot permanently offset dependence on foreign risk appetite. A stronger domestic bond market and long-term savings ecosystem remain unfinished priorities.

Underlying many of these challenges is the issue of governance capacity. The survey emphasises that “policy credibility, predictability and administrative discipline” must become strategic assets in an uncertain world. Regulatory overlaps, judicial delays, and coordination failures continue to raise transaction costs. Infrastructure projects face delays, contracts are disputed, and policy signals are frequently revised. Without institutional strengthening, even well-designed reforms yield suboptimal results.

It is in this context that the survey’s metaphor - that India must “run a marathon and sprint simultaneously” - acquires practical significance. The country must pursue long-term structural transformation while responding rapidly to short-term shocks. Yet ambition alone cannot substitute for sequencing, prioritisation, and administrative capacity. Trying to advance on multiple fronts without institutional consolidation risks overextension.

India’s economic strengths are real and hard-won. Stable external accounts, improving fiscal credibility, rising exports, and expanding reserves have created a platform for sustained growth. But these buffers are only means, not outcomes. The next phase of development will depend on whether India uses this stability to deepen manufacturing capabilities, execute labour reforms, restore state-level fiscal discipline, and build governance institutions that match its aspirations.

The survey’s message is therefore not one of complacent optimism but of conditional opportunity. The coming decade will be won not in headline growth rates, but in the harder terrain of productivity, competitiveness, and administrative credibility. Stability has given India time. What it does with that time will determine whether resilience evolves into enduring economic leadership.

(The author is PT Member-Prime Minister Economic Advisory Council and Professor of Finance)