Economic Survey 2025–26: bright India, darker world

Why is it in news?

• Economic Survey 2025–26, tabled in Parliament, projects a stronger medium-term growth outlook for India while warning of rising global macroeconomic, technological, and geopolitical risks.

Basics: role of the Economic Survey

Purpose and nature

• The Economic Survey is an annual policy document prepared by the Chief Economic Adviser, providing macroeconomic assessment, risk analysis, and reform priorities ahead of the Union Budget.
• It is not legally binding, but guides fiscal policy, market expectations, and medium-term reform direction

India’s growth outlook: optimistic fundamentals

Medium-term growth projection

• The Survey raises India’s medium-term growth potential to around 7%, from the earlier estimate of 6.5%, citing capital formation, labour participation, and productivity improvements.
• For FY27, real GDP growth is projected in a range of 6.8%–7.2%, subject to reform continuity and external stability.

Drivers of domestic resilience

• Growth momentum is supported by public investment in physical and digital infrastructure, manufacturing-linked incentives, logistics reforms, and improving corporate balance sheets.
• Rising formalisation, tax administration efficiency, and MSME credit access are highlighted as structural enablers of sustained growth.

Global outlook: increasingly adverse environment

Three global scenarios for 2026

• The Survey outlines three probabilistic global scenarios, emphasising that risks may interact rather than remain isolated, amplifying macroeconomic stress.

Scenario 1: Best case

• Assigned a 40%–45% probability, where 2025 global conditions continue into 2026, albeit with higher volatility, policy uncertainty, and need for occasional government intervention.

Scenario 2: Multipolar breakdown

• Also assigned a 40%–45% probability, involving intensified strategic rivalry, unresolved Russia–Ukraine conflict, trade fragmentation, sanctions proliferation, and weakening collective security arrangements.

Scenario 3: Worst case

• Assigned a 10%–20% probability, where financial, technological, and geopolitical shocks reinforce each other, triggering sharp risk aversion and contraction in global liquidity.

Emerging risk: AI-driven financial excesses

Nature of the risk

• The Survey flags highly leveraged investments in artificial intelligence as a new systemic risk, driven by optimistic timelines, narrow customer bases, and long-duration capital commitments.
• A correction in AI investments may not halt technology adoption, but could tighten global financial conditions and spill over into capital markets.

Potential spillovers

• If combined with geopolitical escalation or trade disruption, AI-led corrections could cause capital flow reversals, currency volatility, and defensive economic responses across regions.

Comparison with past crises

• The Survey warns that under the worst-case scenario, macroeconomic consequences could exceed the 2008 global financial crisis, due to synchronized shocks and weaker multilateral coordination.

Risks and implications for India

Capital flows and currency pressure

• Across all scenarios, the primary common risk for India is disruption of capital flows, with implications for the rupee, external financing, and monetary stability.
• The impact could be persistent rather than short-lived, depending on duration of global stress.

External sector challenge

• The Survey notes that rising incomes will inevitably raise imports, making it essential for India to boost export earnings and sustain investor confidence in foreign currency.

Policy message for India

• India must leverage its relative stability to attract long-term capital, expand export competitiveness, and maintain macroeconomic credibility amid global uncertainty.
• Domestic strength alone is insufficient; external resilience and risk preparedness are critical in a fragmented global economy.

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