India is entering a position of macroeconomic strength ahead of Budget 2026-27 that was difficult to imagine even a few years ago. Growth remains resilient, inflation is low, public finances are credible and the financial system is stable. However, what makes the current moment unique is that this stability has now persisted without translating into a higher growth trajectory for two consecutive financial years – FY 2024-25 and FY 2025-26. The economy is stable, resilient and growing close to its medium-term potential. Yet, this clarity highlights a deeper concern: The growth model has not decisively shifted gears.
This allows more accurate diagnosis. The constraint on India’s growth is no longer macroeconomic. This is structural.
The Economic Survey 2024-25 clearly outlined this challenge: sustaining and accelerating growth beyond the 6-7% range will depend on private investment, productivity gains and deregulation, not fiscal stimulus. With most of the FY 2025-26 data now available in actual or provisional form, it is possible to test that diagnosis against the results – and draw clear lessons for Budget 2026.
The strongest message from FY25 and FY26 is the durability of macroeconomic stability. In FY 2024-25, real GDP growth stands at 6.4%, close to India’s decadal average. In FY 2025-26, quarterly results so far and official estimates point to a similar trajectory. The Reserve Bank of India has maintained its full year FY26 growth projection of around 6.5% in consecutive monetary policy reviews. This stagnation is itself revealing: downside risks have been managed, but upside momentum has not.
Inflation trends reinforce this picture. After moderation in FY2025, headline CPI inflation in FY26 remains within the tolerance band, with food inflation below historical peaks despite periodic fluctuations. This moderation has come along with stable growth, suggesting that India has moved out of the inflation-growth trade-off phase following the pandemic.
External sector performance has strengthened resilience. The current account deficit remains near 1-1.3% of GDP, comfortably financed by a strong services trade surplus and stable remittances. So far in FY26, services exports – especially IT and business services – have continued to offset the weakness in merchandise exports, providing a respite to the economy from the global manufacturing slowdown.
The impact of rising tariffs and trade restrictions on India’s exports has been managed through adaptation. Faced with trade fragmentation, exporters have increasingly diversified destination markets, reduced overdependence on certain geographic regions, and expanded presence in emerging regions of Asia, Africa, Latin America, and West Asia. On the policy side, the government has accomplished this adjustment through a deliberate strategy – pursuing trade agreements to secure preferential access, expanding production-linked incentives to strengthen cost competitiveness, and investing in logistics and trade facilitation.
The fiscal results complete the stability story. Provisional FY26 data shows the central government’s capital expenditure remains high, while deficit indicators are tracking the budgetary path despite higher tax transfers to states. The tax boom has persisted, even though there has been limited growth in net union revenue due to higher transfers to states. Markets have responded accordingly: sovereign yields have remained broadly stable, reflecting confidence in fiscal discipline.
Financial sector indicators underline how far the system has come. Gross non-performing assets are at a multi-year low, the capital adequacy ratio is well above regulatory norms, and loan growth in FY26 continues without signs of systemic stress. Two years of growth without fiscal weakness is no accident; This shows institutional strength.
If sustainability is the success story, growth drivers tell a more nuanced story.
Private consumption has been the primary constant in both years. In FY25, private final consumption expenditure grew by over 7%, taking its share in GDP to nearly 62%, the highest in two decades. So far in FY26, consumption remains supportive, aided by rural demand, moderation in food inflation and continued welfare support.
However, the structure of consumption reveals limitations. Rural demand has been the main driver, supported by strong agricultural production and MSP operations, while urban discretionary demand has been uneven. Urban FMCG growth has been modest. Passenger vehicle sales growth remained low in FY20 and slowed in FY206, indicating subdued urban sentiment. This suggests that consumption elasticity is being maintained more by policy easing than by broad-based income acceleration.
Gross fixed capital formation growth slowed to around 6.4% in FY20, and early data for FY26 suggest no decisive re-acceleration. The RBI survey shows that capacity utilization is hovering around 74-75% as of FY26, which is only slightly above the long-term average and below the level that typically triggers a strong private capital expenditure cycle.
This is not due to lack of intention. Order book in capital goods sectors grew rapidly in FY2024 and remains healthy in FY2025. Yet implementation has been delayed, reflecting regulatory friction, demand uncertainty and risk aversion. The FY26 results confirm that the translation from intent to execution is in process.
Public capital expenditure has borne much of the burden and will continue to do so in FY26. But two years of growth in public capital expenditure without a decisive private response suggests that the crowding-in mechanism has limits unless structural constraints are addressed.
Labor market indicators have improved in FY15 and FY26, including higher labor force participation and increased female participation. This is a positive structural change, but employment growth is concentrated in manufacturing and services. Manufacturing employment has lagged behind due to weak export demand and cost pressures.
Data so far for FY26 does not suggest a change in this pattern. Without strong manufacturing and tradable sector growth, employment elasticity will remain limited, even if headline growth remains respectable.
What distinguishes the current moment from earlier post-pandemic phases is that the margin of improvement is now visible in the data, not inferred from estimates.
Despite two years of broad stability:
- Capacity utilization remains near 75%
- Private capital expenditure execution has not picked up materially
- Merchandise exports remain weak, and
- The decline in food inflation is due more to favorable supply conditions than to structural reforms.
Food inflation represents challenge. FY25 and FY26 benefited from good agricultural production, but fragmented supply chains, limited cold storage and uneven market integration remain unresolved. As climate variability increases, reliance on favorable monsoons becomes increasingly risky.
Export competitiveness tells a similar story. To deal with the tariff issue, emphasis has been laid on preserving export flexibility through market diversification, supply-side competitiveness and incremental institutional support. The external balance remains largely stable due to exports and remittances of services. Merchandise exports have struggled in FY15 and FY26 amid global tariffs and domestic cost pressures. Without logistics improvements and trade facilitation, this imbalance will persist.
While the current approach has minimized the immediate impact of global trade disruptions, the FY25 and FY26 results suggest that sustaining export growth in a tariff-heavy world will ultimately depend on deep domestic reforms that reduce logistics costs, improve regulatory predictability, and raise productivity in manufacturing and tradable services.
The Economic Survey 2024-25 was clear that deregulation, reduced compliance and trust-based governance were necessary to enhance medium-term growth. FY 2025-26 has made incremental progress on these fronts, and the results so far in FY 26 show that incrementalism is not enough.
Now with FY26 data in hand, three conclusions emerge:
- First, India’s current policy mix provides growth at around 6.5% with stability. It’s an achievement—but it’s also a plateau.
- Second, macro tools have done their job on a large scale. Fiscal prudence, monetary credibility and financial stability are necessary conditions, but they are no longer sufficient to enhance growth.
- Third, the binding constraint is structural. Deregulation, increased productivity and de-risking of private investment are now the decisive levers.
Budget 2026 must therefore shift from conservation to transformation – converting sustainability into scale. this requires:
- Move decisively on reduction of compliance and regulatory simplification, especially for MSMEs and investors. India’s regulatory approach must decisively move from “guilty until proven innocent” to self-certification and “innocent until proven guilty”.
- Creating credible mechanisms to de-risk private capital expenditure, particularly in manufacturing and infrastructure, with PPP mechanisms based on real-world risk-sharing frameworks.
- Addressing structural food inflation through logistics, storage and market integration
- Renewed emphasis on export competitiveness through trade facilitation and cost reduction
India is entering Budget 2026-27 stronger than in previous years. Growth is stable, inflation is manageable, the external account is stable and public finances are credible. FY25 proved that this was possible. FY26 confirmed that this is repeatable.
But repetition is not change. The warning from the Economic Survey 2024-25 is key: without decisive structural reforms, sustainability alone will not lift India’s growth trajectory.
The data now leaves little room for ambiguity: without structural reforms, 6.5% risks becoming the new normal. This destination can be achieved through improvement. The choice is not between prudence and reform. The challenge is to use discretion as a platform for improvement.
This article is written by Davinder Sandhu, Co-Founder and Chairman, Primus Partners and former Senior Advisor, Infrastructure, World Bank.
