Opinion As rules-based order crumbles, only reforms can shield Indian economy
Cyclical supports must make way for structural underpinnings. Policymakers must be commended for jumpstarting this process, both by bringing reforms back on the table and not succumbing to export pessimism
In a world floating with Chinese excess capacity and riddled with US policy capriciousness, a broad-based private investment recovery will require both strong domestic demand visibility and animal spirits 2026 has begun with a sense of cautious optimism that the economy is experiencing a cyclical upswing. Recent GDP prints have surprised to the upside, credit growth is accelerating and some surveys reveal business sentiment may be firming. Near-term buoyancy should not be surprising. The economy has benefitted from a raft of supports in 2025: GST and income tax cuts, monetary and regulatory easing, positive terms-of-trade impulses from lower crude prices, and a second successive strong monsoon. Together, these tailwinds are driving a cyclical lift. The real question is: What will it take for growth to remain strong once the cyclical impulses fade? To do so, the economy must successfully navigate two rotations.
The first rotation is of demand drivers. Post-pandemic growth was driven by a surge in public investment, a revival of the real estate sector, and strong service exports. But several of these impulses are fading. Central capex grew 30 per cent annually for four years post-pandemic but this pace was always going to strain the economy’s absorptive capacity. So, central capex has downshifted to around a 10 per cent annual pace even as state capex risks being cannibalised by competitive populism. Meanwhile, residential real estate has slowed sharply over the last year, unsurprising because it was being driven narrowly by the upper echelon, who have likely reached some saturation point. For the recovery to sustain, demand needs to rotate towards the post-pandemic laggards of private consumption and private investment. What will this entail?
Urban and rural consumption have been in a game of whack-a-mole since the pandemic. Can they finally grow in unison? Rural consumption has lifted smartly in recent quarters. Can urban consumption complement it? Autos have picked up nicely post the GST cuts, but the rest of urban consumption looks more tentative. Consumer durables production has lifted only modestly in recent months and much of the pick-up in personal credit growth is gold loans — underpinned by rising collateral from surging gold prices — suggesting it is more supply-driven than strong demand. Meanwhile, growth of the wage bill of listed companies has slowed from 15 per cent in 2022 and 2023 to mid single digits in 2025. The breadth and durability of the consumption recovery will, therefore, come down to whether household balance sheets and employment can strengthen enough in 2026.
Goods exports have been resilient in the face of punitive US tariffs, with exporters finding alternative markets. That said, non-oil export growth rates slowed to 3 per cent (in nominal dollars) by the end of last year. Exports therefore have their work cut out in 2026.
What does all this imply for private capex? In a world floating with Chinese excess capacity and riddled with US policy capriciousness, a broad-based private investment recovery will require both strong domestic demand visibility and animal spirits. It is unsurprising, therefore, that cash flow statements of listed companies reveal capex slowed in the first half of this fiscal year compared to last year, in contrast to market expectations. Instead, the fate of private capex hinges on the strength of the consumption and exports recovery. Can a durable recovery of the latter finally crowd in the former? That remains the $4-trillion question for 2026.
The second rotation is the cyclical making way for the structural. The space for more cyclical support is exhausted. Rampant Chinese excess capacity is likely to keep inflation contained but also pull nominal GDP growth into single digits. Assuming 9 per cent nominal growth for the foreseeable future, the combined (central and state) fiscal deficit will need to be reduced by another percentage point of GDP just to keep public debt/GDP at 80 per cent. There is no further space for fiscal support. Parenthetically, lower nominal GDP prospects also accentuate perceptions that India’s equity market is expensive and explains why foreign portfolio flows have been reluctant. Meanwhile, low inflation can keep monetary policy in play but with real rates already down to 1.25 per cent, the space for more support, if any, is very modest.
The implication: Cyclical supports must make way for structural underpinnings. Policymakers must be commended for jumpstarting this process both by bringing reforms back on the table (GST rationalisation, new labour codes, 100 per cent FDI in insurance) and not succumbing to export pessimism (by signing a slew of free trade agreements). But the structural ask is long. Over the last two decades, growth has become prematurely capital-intensive and there is an urgent need to reverse this drift. Only labour-intensive growth will generate the household incomes to drive sustained consumption growth. But this will require the labour force to become more employable — as it competes with capital — through a mission-like focus on education, skilling and health. Human capital augmentation is India’s biggest imperative over the next decade. If industrial policy is to be exercised, it must be in labour-intensive sectors and formalisation must not push up the marginal cost of labour to the point that businesses, paradoxically, turn more capital-intensive.
Meanwhile, the export push must be taken to its logical conclusion by joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPPTP), a large free trading block that accounts for 15 per cent of global trade. The upcoming budget is the perfect opportunity to simplify, rationalise and liberalise customs duties, imports tariffs and non-tariff barriers such as QCOs. The old adage — an import tariff is an export tax — has never been truer in a world of global supply chains.
There is no time to waste. Over the last 10 years, per capita GDP growth in US dollars has clocked 5.9 per cent. To reach $15,000 per capita by 2047, the asking rate of per capita growth in dollars is 8 per cent for the next 22 years, at a time when India’s working age population growth — which averaged 1.5 per cent over the last decade — will progressively go to zero. The quantum of labour productivity growth needed in these circumstances, will require a relentless pace of reform.
The task before us is clear and daunting but not impossible. At a time when the rules-based global order is falling apart and being replaced by the law of the jungle, only sustained economic reforms will induce investment, attract capital flows, create jobs, and thereby create a protective sheath around the economy against a hostile and precarious global backdrop.
The writer is head of Asia Economics at JP Morgan Chase Bank
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