Economic Survey: Can India sustain a high pace of growth in a highly uncertain world?

Without necessarily endorsing every point it makes, it must be recognized that the survey has emerged in recent years as a very detailed, evidence-based and sound analysis of the state of the Indian economy and the way forward, a ‘must read’ for any serious student of the Indian economy. It will take more than a few hours to do full justice to this detailed, 740-page document in this quick column.

However, the chief economic advisor’s recent column in Mint, the survey’s preface and abstracts of each of the chapters provide its key takeaways.

Global uncertainty was already high prior to Donald Trump’s second term as US President. But he has taken it to a whole new level by upending the global economic and geopolitical order.

The survey points out, correctly, that throughout this turmoil, India has maintained high growth (7.4% projected for 2025-26) along with very low inflation. Macroeconomic stability has been supported by sustained fiscal-deficit reduction, high public infrastructure investment, strong bank balance sheets, a manageable current account deficit and low external debt. These earned India three credit rating upgrades last year.

However, emerging market economies such as India that run current account deficits—even manageable deficits—face the risk of international capital inflows reducing or even reversing during periods of high geopolitical uncertainty. Capital outflows lead to currency depreciation, which leads to more capital outflows.

The rupee’s depreciation has unfortunately accelerated; it dropped by over 6% last year. The survey makes the point that in this uncertain world, capital flows are not driven by sound macro-fundamentals and trade efficiency, but by geopolitics and strategic alliances. In this context, India is punching below its potential, measured by the Lowy Institute’s Power Gap score of (-)4, about the lowest in Asia.

How does India get to its potential? The survey looks at three potential scenarios: one where the outlook is similar to 2025 but with gradually rising uncertainty; a second scenario where geopolitical tensions become more intense, institutional shock absorbers turn weaker and trade-offs sharper between autonomy, growth and stability in a world of hyper-nationalism.

Both of these scenarios get a subjective probability of 40-45% in the survey. A residual scenario with a 10-20% probability describes a more catastrophic economic breakdown.

In all three scenarios, India is relatively well placed, thanks to its strong macroeconomic fundamentals, a large domestic market, a less financialized growth model and large foreign exchange reserves. These provide India some strategic autonomy. But this does not guarantee insulation from disruption of capital flows and the consequent impact on the rupee. What must India do?

On the fiscal policy front, the survey applauds the Centre’s continuing fiscal consolidation, along with its thrust on public infrastructure investment. But it warns of falling expenditure quality in several states, rising unconditional transfers and revenue deficits, which are hurting investor confidence and driving up the cost of capital. Also, the survey identifies persistent current account deficits, which raise the cost of borrowing in global debt markets, as a major structural reason for the high cost of capital.

This points directly to the role of foreign trade. The survey recognizes the contribution of India’s surplus in service exports in significantly offsetting the large deficit in merchandise trade, but suggests that infotech-enabled service exports are fragile, unlike the export of manufactured goods.

That in turn leads the survey to an industrial policy stance that eschews protection for upstream industries (such as steel, other metals and fibres), which raises the cost of downstream manufacturing, and instead focuses on policy support for downstream manufacturers in facing global hyper-competition led by an export-dominant China.

The priority given to manufacturing over services and a parallel privileging of growth in GDP over growth in employment is embedded in the survey’s overarching theme of self- reliance, which dates back to India’s strategy of planned development in the 1950s. But the substance is different 75 years later, as is the context. Self-reliance is now combined with the idea of resilience—not just environmental in the context of climate change, but also against geopolitical shocks in a more uncertain world.

Three chapters bear special mention. One relates to AI and how India should adapt to it; a second is about urbanization and cities; and a third is on the relative roles of an entrepreneurial state vis-à-vis the private sector and citizens, whose priorities often drive public policies.

For the latter, the survey poses a choice between immediate versus future gratification. While valid for many, there is not much to choose here for undernourished and underemployed citizens who need a social safety net for survival. Perhaps a middle path between the two extreme options is best.

These are the author’s personal views.

The author is chairman, Centre for Development Studies.