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Fiscal Developments: Anchoring Stability Through Credible Consolidation

• India received three sovereign credit rating upgrades in 2025 (Morningstar DBRS, S&P Global Ratings, and R&I), reflecting confidence in its fiscal discipline, transparency, and medium-term consolidation roadmap.
• The fiscal deficit declined sharply from 9.2% of GDP in FY21 to 4.8% in FY25 (PA) and is budgeted at 4.4% in FY26, reflecting steady consolidation.
• The primary deficit declined significantly, indicating that fresh borrowings are increasingly used to service legacy debt rather than fund current expenditure.
• Central Government revenue receipts improved from 8.5% of GDP (FY16–FY20) to 9.1% of GDP (FY22–FY25), driven by strong tax collections and economic formalisation.
• Gross tax revenue rose from an average of 10.8% of GDP pre-pandemic to 11.5% post-pandemic, supported by tax reforms, digital compliance, and profitability recovery.
• The share of direct taxes increased from 51.9% pre-pandemic to 58.8% in FY25, reflecting a structurally stronger tax base.
• Non-corporate taxes (personal income tax) showed strong buoyancy, rising from 2.4% of GDP pre-pandemic to 3.7% of GDP in FY25, with an average buoyancy of 1.8 during FY23–FY25.
• The number of income-tax returns filed increased from 6.9 crore in FY22 to 9.2 crore in FY25, reflecting deeper compliance and widening tax net.
• Gross GST collections remained stable, reaching Rs. 17.4 lakh crore (US$ 199.23 billion) during April–December FY26, growing in line with nominal GDP while achieving multiple all-time highs in absolute terms.
• The GST taxpayer base expanded sharply from 60 lakh in 2017 to over 1.5 crore, indicating deeper economic formalisation.
• GST 2.0 reforms introduced a simplified two-rate structure, lowering tax incidence on essential goods, labour-intensive sectors, automobiles, textiles, healthcare, and renewable energy equipment.
• Non-tax revenues remained stable at around 1.4% of GDP, supported by rising dividends and profits from CPSEs and surplus transfers from RBI.
• RBI approved a record surplus transfer of Rs. 2.68 lakh crore (US$ 30.68 billion) in FY26, 27% higher than the previous year.
• Revenue expenditure moderated from 13.6% of GDP in FY22 to 10.9% in FY25, below pre-pandemic levels, creating fiscal space for capex.
• Major subsidies reduced from 1.9% of GDP in FY22 to 1.2% in FY25, aided by Direct Benefit Transfers (DBT), without compromising food security.
• Capital expenditure increased from 1.7% of GDP pre-pandemic to 2.9% post-pandemic, with effective capex reaching 4% of GDP in FY25.
• During FY26 (April–November), capex grew by 28% YoY, while revenue expenditure grew only 1.8%, reinforcing consolidation.
• Centre-State transfers more than doubled from Rs. 11.5 lakh crore (US$ 131.67 billion) in FY20 to Rs. 25.6 lakh crore (US$ 293.12 billion) in FY26 (BE), rising to 6.9% of GDP.
• States’ combined fiscal deficit remained around 2.8% of GDP, but revenue deficits widened due to slower revenue growth and rising cash transfer schemes.
• States’ own tax revenues grew at a CAGR of 12.6% post-pandemic, increasing their share in total revenues to nearly 50%.

External Sector: Playing the Long Game

• The global economic order is shifting from hyper-globalisation to a more fragmented, security-driven and geopolitically aligned trade system, amid rising trade policy uncertainty, retaliatory tariffs, strategic decoupling and national security concerns.
• This uncertainty peaked in April 2025, with TPU and GEPU indices at multi-decade highs, alongside stronger friend-shoring trends and persistently weak near-shoring, reflecting a preference for politically aligned partners.
• Global trade growth benefited temporarily from front-loading of orders ahead of tariff hikes, but medium-term prospects remain subdued due to fragmentation.
• IMF projects global trade volume growth to moderate from 3.5% in 2024 to 3.6% in 2025 and further to 2.3% in 2026.
• Services exports remained the primary growth driver, expanding by 13.6% YoY in FY25, supported by software, business services, and Global Capability Centres (GCCs).
• Total imports increased by 7.4% YoY in FY25 to Rs. 80.33 lakh crore (US$ 919.9 billion), reflecting strong domestic demand. India’s overall trade deficit stood at Rs. 8.27 lakh crore (US$ 94.7 billion) in FY25, widening further in FY26 due to higher imports.
• Merchandise exports stood at Rs. 38.22 lakh crore (US$ 437.7 billion) in FY25, broadly unchanged from FY24 due to price effects in petroleum and gems and jewellery.
• Non-petroleum, non-gems and jewellery exports accounted for 78.7% of total merchandise exports and grew by 7.5% YoY.
• Exports of telecom instruments surged by 51.2% YoY, while drug formulations and biologicals grew by 11.2% YoY, reflecting strength in electronics and pharmaceuticals.
• Merchandise imports rose by 6.3% YoY in FY25, driven by higher demand for capital goods and intermediate inputs.
• Imports of gold increased by 27.4% YoY, reflecting rising global prices and strong domestic demand.
• The merchandise trade deficit widened to Rs. 24.75 lakh crore (US$ 283.5 billion) in FY25, up 17.6% YoY. In FY26 (April–December), merchandise exports grew by 2.4% YoY, with electronics exports rising sharply by 35.1% YoY. Merchandise imports during the same period grew by 5.9% YoY, reflecting resilient consumption and investment demand.
• India’s agricultural exports rose from Rs. 3.01 lakh crore (US$ 34.5 billion) in FY20 to Rs. 4.46 lakh crore (US$ 51.1 billion) in FY25 at an 8.2% CAGR, making it the world’s second-largest agricultural producer by value with a 2.2% share of global exports, though export growth stagnated between FY23 and FY25 despite expanding global trade.
• PLI sectors recorded strong export performance with average annual growth of 10.6% during FY21–FY25, led by high-growth segments such as electronics, IT hardware, ACC batteries, solar PV, and speciality steel, with electronics exports expanding at 38.8% annually and the telecom sector showing early import substitution as exports rose and imports declined.
• India mitigated high US tariff exposure by diversifying export markets toward the UAE, EU, Africa, Latin America, and ASEAN, reducing US dependence on gems, textiles, and auto components, while also diversifying crude oil imports across the US, UAE, Egypt, Nigeria, and Libya.

Industry’s Next Leap – Structural Transformation and Global Integration

• India’s industrial sector in FY26 showed renewed momentum despite global headwinds, driven by a structural shift toward medium- and high-technology manufacturing and supported by policy-led capability building.
• Global manufacturing competitiveness is increasingly shaped by strategic indispensability within Global Value Chains (GVCs), requiring scale, productivity, technology depth, innovation capacity, and policy stability rather than low-cost advantages alone.
• India’s long-term industrial strategy aims to position the country as a high-tech, high-productivity manufacturing hub integrated into GVCs, anchored by PLI schemes, the National Manufacturing Mission (NMM), and innovation-focused institutional reforms such as ANRF and the RDI Fund.
• Global manufacturing recovery remained uneven in 2025, with output growth of 0.7% in Q3, led by Africa and Asia, while Europe stagnated and Latin America contracted.
• Medium and high-technology manufacturing outperformed low-tech segments, reflecting a global pivot toward resilient, technology-intensive value chains and supply security.
• India’s industrial GVA grew by 7.0% YoY in H1 FY26, accelerating from FY25, with manufacturing GVA expanding sharply in both Q1 and Q2, indicating strengthening domestic capabilities rather than cyclical weakness.
• Medium- and high-technology activities now account for 46.3% of manufacturing value added, and India’s Competitive Industrial Performance ranking improved to 37th in 2023.
• Bank credit growth to industry moderated in FY25, reflecting diversification of funding sources rather than weaker investment sentiment.
• Non-bank and market-based financing expanded rapidly, improving funding depth, stability, and reducing cyclicality in industrial investment.
• Cement: India remains the world’s second-largest producer, with rising capacity and low per-capita consumption indicating strong infrastructure-led demand potential.
• Steel: Crude steel production and consumption grew at double-digit rates, supported by construction and manufacturing, while PLI for specialty steel boosted investment; dependence on imported coking coal remains a vulnerability.
• Coal: Coal continues to anchor energy security, with production exceeding 1,047 MT in FY25 and domestic supply increasingly outpacing consumption.
• Chemicals & Petrochemicals: The sector contributed over 8% of manufacturing GVA, with steady long-term output growth.
• Capital Goods & Consumer Goods: Strong investment cycles lifted exports and imports, underscoring both demand strength and the need for indigenous advanced machinery capabilities.
• Automobiles: India retained global leadership in 2W and 3W, strong export growth, and rapid EV adoption supported by multiple PLI and e-mobility schemes.
• Electronics: Electronics emerged as a top export category, with mobile phone production and PLI-led output and exports scaling rapidly.
• Pharmaceuticals & Medical Devices: India remained a global generics powerhouse, supplying ~20% of global demand with exports to over 190 countries.
• Textiles: While contributing ~2% of GDP, the sector faces structural challenges; PM-MITRA, MMF-focused PLI, and regulatory rationalisation aim to improve scale and competitiveness.
• The PLI scheme across 14 sectors mobilised large investments, incremental production, exports, and employment by September 2025, reinforcing scale and technology upgrading.
• The National Manufacturing Mission targets raising manufacturing’s GDP share to 25% by 2035 and generating 143 million jobs.
• India’s innovation ecosystem strengthened, with a sharp improvement in the Global Innovation Index and leadership positions across multiple critical technologies, supported by the Rs. 1 lakh crore (US$ 11.45 billion) RDI Fund.
• Expansion of Quality Control Orders improved domestic competitiveness and import substitution in several sectors, with emphasis on pragmatic implementation to protect MSMEs and supply chains.

Employment and Skill Development – Getting Skilling Right

• India’s workforce of over 56 crore people is a key growth engine, with labour market indicators showing steady job creation, rising labour force participation and declining unemployment, supported by resilient macroeconomic growth and structural reforms.
• Policy emphasis has shifted from the quantity of jobs to the quality of employment, focusing on productivity, income security, worker well-being and inclusive growth as India approaches the peak of its demographic dividend around 2030.
• Alongside this, India is entering a demographic transition with declining fertility and rising life expectancy, requiring policies that also harness a longevity dividend through healthier and longer working lives.
• Periodic Labour Force Survey (PLFS), ASI and Quarterly Bulletin of Unincorporated Sector Enterprises (QBUSE) data indicate improving labour market conditions, with rising Labour Force Participation Rate (LFPR), falling unemployment and job creation across both organised and unorganised sectors.
• In Q2 FY26, 56.2 crore people were employed, with net job creation of 8.7 lakh over the previous quarter; monthly data show LFPR rising to 56.1% and unemployment declining to 4.8% by December 2025.
• PLFS data show sharp rural–urban contrasts in India’s employment, with agriculture and self-employment dominating rural areas, while urban jobs are led by services and salaried work. In Q2 FY26, agriculture and self-employment accounted for 42.4% and 55.8 % of total employment, respectively, with casual labour at 18.9%.
• Rural employment is dominated by agriculture and self-employment, while urban employment is concentrated in services and regular wage jobs, highlighting the need for smoother farm–non-farm transitions and decent work policies.
• Women’s employment is skewed toward self-employment and household enterprises, offering flexibility but lower income security, compounded by a high unpaid work burden.
• Female Labour Force Participation rose sharply from 23.3% (2017–18) to 41.7% (2023–24), with falling female unemployment, supported by state-level reforms enabling women’s night-shift work and broader sectoral access.
• The unorganised sector remains central to India’s labour market; the e-Shram portal has registered over 31 crore workers (54% women), providing portability through UANs and integration with major social security schemes.
• e-Shram is evolving from a registry to a platform linking workers to jobs, apprenticeships and skilling pathways, improving income security and productivity.
• Organised manufacturing employment grew by 6% in FY24, adding over 10 lakh jobs, with productivity and wages improving, especially in large factories.
• Employment is highly concentrated by firm size and geography, with a small share of large factories accounting for most jobs, underscoring the importance of scaling firms and improving job quality.
• India’s gig workforce expanded rapidly to 1.2 crore workers by FY25 and is projected to reach 6.7% of the workforce by 2030, driven by digital platforms, e-commerce and logistics.
• Despite growth, challenges persist around income volatility, limited social security, credit access, algorithmic management and skill obsolescence.
• The four Labour Codes, notified in November 2025, consolidate 29 laws to balance flexibility with protection, recognising gig workers, enabling portable social security and reducing compliance burdens.
• Expected outcomes include higher formalisation, additional job creation, lower unemployment and significant compliance cost reductions for SMEs, supported by state-level rulemaking and gender-inclusive reforms.

From Import Substitution to Strategic Resilience and Strategic Indispensability

• India enters the second half of the 2020s with strong macroeconomic fundamentals, including high relative growth, stable inflation, a resilient banking system, manageable external balances, and ample foreign exchange reserves, placing it in a stronger position than most major economies after repeated global shocks.
• The chapter argues that macroeconomic stabilisation is no longer the binding constraint. Instead, in an era of geopolitical fragmentation and strategic trade, the decisive constraint has shifted toward building productive capabilities and state capacity that can sustain growth under uncertainty.
• The development challenge is therefore reframed: the key question is not only how fast India grows, but whether growth creates durable capabilities, reduces external vulnerabilities, and embeds India more deeply into global economic systems as a reliable partner.
• This reframing introduces a transition from strategic resilience, defined as the ability to absorb shocks and maintain stability, to strategic indispensability, where India becomes systemically important to global value chains.
• India’s post-pandemic growth has strengthened, with capital formation exceeding 30% of GDP and a healthy banking system, while reforms such as labour codes, a Rs. 12 lakh (US$ 13 thousand) income tax threshold, and GST rationalisation have boosted household purchasing power, eased inflation, and reinforced investor confidence.
• The agricultural and rural economy has provided support through favourable monsoons, expectations of a strong Rabi crop, positive real wage growth, and resilient rural consumption, even as urban consumption shows some moderation amid global uncertainty.
• Policy actions have reinforced growth momentum through sustained public investment in infrastructure, 50-year interest-free loans to States, income-tax relief to households, GST rationalisation, and selective opening of sectors such as insurance and nuclear power.
• Strategic self-sufficiency efforts have accelerated in critical minerals, semiconductors, shipbuilding, alongside broader resilience across energy and defence ecosystems, reflecting lessons from recent supply-chain disruptions.
• The post-Cold War global economic order has fragmented due to the technology bubble, China’s manufacturing dominance, the Global Financial Crisis, and prolonged reliance on ultra-loose monetary policy in advanced economies.
• The resulting “QE infinity trap” inflated asset prices rather than productive investment, weakened productivity growth, made manufacturing-centric communities vulnerable, and fuelled political backlash and protectionism.
• COVID-19 accelerated these trends, shifting global trade away from multilateralism toward strategic trade, export controls, licensing regimes, and bilateral arrangements.
• In this environment, global trade is increasingly strategic rather than rules-based, increasing uncertainty and narrowing the margin for policy error for emerging economies.
• Rapid advances in artificial intelligence have turned technology into a strategic economic asset, sharply increasing demand for compute, electricity, water, and critical minerals, and straining global energy systems.
• Rising demand from AI-led data centres and power infrastructure pushed copper prices up nearly 20% in 2025 to around USD 12,000 per tonne, highlighting how even basic industrial metals are emerging as strategic bottlenecks.
• Although India has managed its external accounts prudently recent portfolio outflows were triggered by US tariff actions and shifting geopolitical alignments, reinforcing currency vulnerability given India’s goods trade deficit rather than by a structurally strong merchandise export base.
• With the goods trade deficit exceeding the services surplus, India remains exposed to global capital flow volatility, reinforcing the need for stronger export capability.
• In a world of export controls, technology denial regimes, and carbon border measures, Swadeshi becomes unavoidable but must be pursued as a strategic tool rather than ideological isolation.
• The chapter stresses that not all import substitution is desirable; indiscriminate protection erodes efficiency and competitiveness.
• Disciplined indigenisation must be temporary, time-bound, performance-linked, and export-oriented, ensuring that import substitution culminates in global competitiveness.
• Import substitution, strategic resilience, and strategic indispensability must now be pursued simultaneously, compressing decades of capability building into a shorter timeframe.