Navigating growth in a fragmented world

As the global economy turns increasingly volatile, India must augment State capability towards strategic, manufacturing-led growth

The release of the Economic Survey 2025-26 and the Union Budget 2026-27 offers the opportunity to read diagnosis and prescription together. The challenge in the year ahead is no longer merely to sustain growth, but to align growth with resilience, competitiveness, and strategic autonomy in a world marked by geopolitical rivalry, trade weaponisation, and financial uncertainty.

India enters 2026 with strong macroeconomic fundamentals. Growth remains near 7 per cent, inflation is anchored, public investment at scale, banks and corporate balance sheets are healthy, and fiscal consolidation is credible. Together, they represent tangible gains from infrastructure expansion, logistics improvements, digital public infrastructure, and supply-side reforms that are finally yielding economy-wide efficiency gains. Yet, the Survey makes an uncomfortable but essential point: macroeconomic virtue is no guarantee of rewards. The rupee has remained under pressure, capital flows have been volatile, and trade conditions have worsened. This is a feature of a global system in which trade, finance, and technology are increasingly subordinated to strategic considerations. Tariffs, export controls, and sanctions are now instruments of hostile statecraft. For India, this means that the old development playbook – grow fast, liberalise gradually, integrate smoothly – no longer works. The challenge, therefore, is to grow strategically.

The Budget reinforces India’s hard-won fiscal credibility. The fiscal deficit is budgeted at 4.3 per cent of GDP for 2026-27, with a clear medium-term anchor of reducing public debt to around 50 per cent of GDP by 2030. Capital expenditure continues to rise in absolute terms even as revenue expenditure is restrained. This capex emphasis – across roads, railways, ports, logistics, energy, and urban infrastructure – is the defining feature of India’s fiscal strategy. However, the Survey’s warning on state finances deserves closer attention. Rising revenue deficits, unconditional cash transfers, and populist commitments at the sub-national level risk undermining the general government balance sheet.

As India’s government bonds become more globally held and indexed, sovereign risk will be assessed on the basis of consolidated public finances, not just the Centre’s accounts. Fiscal discipline is no longer merely a technocratic virtue; it is now a strategic signal. The Budget’s continued support to states for capital investment, alongside incentives for urban infrastructure, municipal bonds, and asset recycling, points in the right direction. But consolidation will remain fragile unless states internalise the medium-term growth costs of substituting investment with consumption.

Perhaps the Economic Survey’s most sobering insight concerns India’s external constraint – the structural current account deficit and the underlying goods trade gap. In a world of volatile capital flows and episodic financial stress, this dependence is risky. History is unambiguous: strong and stable currencies belong to economies with deep manufacturing export bases. Services-led growth, while valuable, does not generate the same ecosystem effects – on logistics, skills, supplier networks, and State capacity – that manufacturing does. Nor does it anchor currencies during global stress. The Union Budget’s strong push towards manufacturing – spanning microelectronics, semiconductors, chemicals, defence, aerospace, construction equipment, and rare earth magnets – must be read against this backdrop.

The emphasis on customs rationalisation, duty deferrals for trusted manufacturers, export facilitation, and bonded manufacturing zones signals a conscious shift away from tariff-led protection towards cost, scale, and reliability. Yet, a strategic caution is warranted. Industrial policy must not degenerate into a patchwork of sectoral favours. High tariffs on upstream inputs may shelter a few producers but end up taxing a much larger base of downstream exporters. The real test will be whether the country can lower the cost of capital, energy, and logistics while disciplining industrial support through export performance and competition.

The Survey is clear-eyed: manufacturing matters not only for jobs, but for macroeconomic and strategic stability. In a world where supply chains are weaponised and security of supply is uncertain, domestic manufacturing capability enhances bargaining power and resilience. The Budget reinforces this logic through targeted incentives, infrastructure guarantees, freight corridors, port connectivity, and energy security measures, including support for nuclear power, critical minerals processing, battery storage, and carbon capture. However, manufacturing success will ultimately depend less on schemes and more on execution: regulatory predictability, contract enforcement, skilled labour, and reliable utilities.

Can capacity meet ambition?

One of the Survey’s most consequential arguments is the call to reimagine the Indian State as an entrepreneurial one: capable of acting under uncertainty, learning by doing, and correcting course without paralysis. This is not a call for State capitalism or bureaucratic control, but for strategic governance. There are encouraging signs – mission-mode initiatives in semiconductors and green hydrogen, digital public infrastructure, deregulation compacts with states, and trust-based compliance in customs and taxation, many of which the Budget extends and operationalises. The move towards risk-based regulation, automated processes, and the decriminalisation of minor economic offences reflects a maturing regulatory philosophy. Yet State capacity remains the binding constraint. Civil service capability, regulatory coherence, and Centre-state coordination will determine whether India converts ambition into advantage.

Both the Survey and the Budget place renewed emphasis on human capital – education, skilling, healthcare, and care services. The Budget’s focus on caregivers, allied health professionals, education-to-employment pathways, and services-sector expansion reflects a pragmatic recognition: India’s growth must be employment-intensive to remain socially and politically sustainable. The demographic dividend is not automatic. Without quality jobs, rising aspirations can quickly turn into disaffection. Manufacturing, construction, logistics, tourism, healthcare, and the care economy offer high employment multipliers, but only if skills, mobility, and urban governance keep pace. Here lies the deeper political economy challenge.

In an era of global uncertainty, the temptation for quick redistributive fixes will grow. The harder, more durable path is to prioritise productivity, employability, and delayed gratification – what the Survey evocatively frames as choosing shreya over preya – requiring resolve to master institutions, strategy, and statecraft.

(The writer is Director, School of Social Sciences, Ramaiah University of Applied Sciences)

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)