Economic Survey pegs India’s FY26 GDP growth at 6.3-6.8%, domestic growth levers important

The Survey, tabled in Parliament Friday, comes in the backdrop of a slowing economy, which is estimated to grow at 6.4 per cent in 2024-25, the slowest in four years. The Economic Survey in July 2024 tabled immediately after the NDA returned to power had projected India’s growth rate to be 6.5-7 per cent for FY25.

“The Indian economy is on a steady growth path. The macroeconomic health checklist looks good. As the country aims to accelerate its economic growth rate in the coming years, it has the tailwind of strong balance sheets in the domestic corporate and financial sectors. But, globalisation is on the retreat. Hence, raising the growth average in the next two decades will require reaping the demographic dividend through a deregulation stimulus,” Chief Economic Advisor V Anantha Nageswaran wrote in the preface of the Survey.

The focus on domestic levers, according to Nageswaran, has to be there also because the era of rapid world trade growth has passed, but it continues to cloud the outlook for India’s export growth. Historically, India’s export growth has been a high beta play on global export growth. “This means domestic growth levers will be relatively more important than external ones in the coming years,” he said.

Allowing economic activity as far as possible and “getting out of the way” will foster faster convergence of living standards and per capita incomes, the Survey said. The most effective policies governments – Union and states – in the country can embrace is to “give entrepreneurs and households back their time and mental bandwidth”.

That means rolling back regulation significantly, it said. That means vowing and acting to stop micromanaging economic activity and embracing risk-based regulations. That means changing the operating principle of regulations from ‘guilty until proven innocent’ to ‘innocent until proven guilty’,” it said.

The Indian economy will need to grow at the rate of around 8 per cent at constant prices, on an average, for about a decade or two, to achieve its stated goal of Viksit Bharat by 2047.

To achieve this growth, the investment rate must rise to approximately 35 per cent of GDP, up from the current 31 per cent, the Survey said. Also, the manufacturing sector will have to be developed further along with more investment in emerging technologies such as AI, robotics, and biotechnology, it said. India will also need to create 78.5 lakh new non-farm jobs annually till 2030, achieve 100 per cent literacy, develop the quality of educational institutions, and develop high-quality, future-ready infrastructure at scale and speed, the Survey said.

A dozen states have reform potential, the Survey said, classifying them into four broad categories — states with high per capita industrial Gross State Value Added (Gujarat, Uttarakhand, Himachal Pradesh, Chhattisgarh, Odisha); strong service sector performers (Karnataka, Telangana, Kerala); dual strength – industrial and service (Maharashtra and Tamil Nadu); and states with reform potential (Arunachal Pradesh, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Manipur, Meghalaya, Nagaland, Rajasthan, Tripura, Uttar Pradesh and West Bengal).

Nageswaran highlighted the global risks in the form of the recent strength in the US dollar and rethinking in the Federal Reserve about the path of policy rates in America that have caused emerging market currencies to weaken. “Fiscal strains and low real rates relative to history have led to rapid erosion of value in some currencies compared to others. Borrowing costs for sovereigns are also rising as financial markets re-evaluate the outlook for inflation, policy rates and fiscal prudence,” he said

Citing India’s low production capacity in the solar energy sector for key components like polysilicon, ingots, and wafers, Nageswaran also pointed out the limitations faced by India in producing critical goods at the scale and quality required to serve the infrastructure and investment needs of an aspiring economy. “It means going all out to attract, promote and facilitate further domestic and foreign investments that India needs to become a competitive and innovative economy. It will not be easy because competition for investment is not only with other emerging economies but advanced economies, too, who are determined to keep their businesses at home,” he said. For this, investing in and strengthening domestic supply-chain capability and resilience will be the hallmarks of strategic and long-term thinking on the part of the private sector, he added.

Overall, India’s economic prospects for FY26 are balanced, the Survey said, adding that rural demand backed by a rebound in agricultural production, an anticipated easing of food inflation and a stable macroeconomic environment will provide an upside to near-term growth. However, headwinds to growth include elevated geopolitical and trade uncertainties and possible commodity price shocks. “Domestically, the translation of order books of the private capital goods sector into sustained investment pick-up, improvements in consumer confidence, and corporate wage pick-up will be key to promoting growth,” it said.

While many manufacturing sub-sectors recorded growth, others faced challenges this year. Oil companies were impacted due to inventory losses and lower refining margins, while steel companies faced price pressures and lower global prices. The cement sector also faced weak demand in Q2 due to heavy rains and lower selling prices. “However, with the conclusion of the monsoon season and the expected pick-up in government capital expenditure, sectors such as cement, iron, and steel are expected to see a recovery. Further, mining and electricity are expected to normalise after the monsoon-related disruptions,” it said.

The slowdown in investment activity is likely temporary, the Survey said, adding that green shoots in capital formation are visible.

On the inflation front, the Survey said food inflation is likely to soften in Q4 FY25 with the seasonal easing of vegetable prices and Kharif harvest arrivals. Good Rabi production is likely to contain food prices in the first half of FY26. Adverse weather events and rise in international agricultural commodity prices, however, pose risks to food inflation. Global energy and commodity prices have softened in the recent past, making the core inflation outlook benign, it said. However, risks remain on account of significant global political and economic uncertainties.

The Survey said the global economy is now transitioning to a phase where the traditional, fundamental policy levers that were once effective may no longer be applicable or even relevant, and across the world, the focus of policy making globally has shifted inwards. “The evolving trade stance of a few major economies could affect key Indian export sectors such as chemicals, machinery, textiles, and electronics. In the short term, diversifying export markets is essential, while medium-term efforts should focus on increasing market share. Over the long term, India must position itself as a strategic partner in high-value sectors like biotechnology and semiconductors,” it said.

Policy priorities will have to be for women, farmers, youth and the poor, and facilitating their productive and enhanced participation in economic activity will be the litmus test of inclusive development policies. “It is about finding pathways for advancing their income and living standards through empowerment. For women, governments around the country will have to eliminate legal and regulatory hurdles that hold back their participation in the labour force besides undertaking facilitative measures,” it said.