The new year opens with the Indian economy in a strong position, described as a “Goldilocks” by the governor of the Reserve Bank of India last month. Growth is strong, inflation is low; economic activity is neither too fast, nor too slow. Early estimates from then show that the GDP will grow faster than expected, at 7.4% in 2025-26. Slowing momentum will, however, set in through the second half of the year. Most growth forecasts for next year, 2026-27, range mid-6%, a moderation from this year. What are the prospects ahead?
The backdrop is mixed. Beneath the measured economic strength are a few vulnerabilities, some of longstanding nature. It must be underlined that the strong performance is helped by exceptionally low inflation (the GDP deflator) in decades; adding in the latter, GDP in current terms is a good 2-percentage points lower than anticipated a year ago. This, in particular, bears upon the government’s financial position because it depresses tax collections and enlarges public debt and deficit — these variables are assessed in relation to nominal output.
Next is weak consumption, which is slower than that in the previous year. Household indebtedness is higher from a three-year borrowing spree, mainly for consumption. Such personal loans have now slowed, one-third of borrowers are high-risk, while households are increasingly saving less of the income at their disposal. Their business counterparts, on the other hand, or the private corporate sector, have the strongest balance sheets and piles of cash, yet their spending is insipid. For the most part, government spending on infrastructure has filled this gap. The investment deficit extends further to foreign capital, both direct as well as short-term portfolios — their combined GDP share sank abysmally low last year (0.12%) and the exodus has carried forward, continuing to date. That is pressurising the exchange rate, squeezing policies, and generating caution.
Outstanding policy efforts last year strove to stimulate consumer demand. Important fiscal measures included the income tax relief last February and a broad-based reduction in goods and services tax slabs in September. Monetary policy complemented with steep interest rate reductions. A set of reforms focused on mitigating the blow to exports, especially the 50% US tariff affecting labour-intensive exports like textiles, footwear, and marine products, and to match the fiercely competitive realignment of trade partnerships across the world. Noteworthy moves were the quick closures of a few trade agreements, labour market reforms, the liberalisation of the insurance and the nuclear segments, and specific deregulations at Central and state government levels.
Prospective economic performance is to be considered from these standpoints. Including the one-off boosts, some drivers that have upheld growth are losing steam; others are yet to firm up, and there are some important downside risks.
Topmost is the government’s tightening financial position. Tax collections have lagged significantly to that in last November, pointing to a low probability of catch-up in the remainder months. This shortfall coincides with belt-tightening pressures to reduce public debt and check the fiscal deficit. This could squeeze the government’s capacity to lead growth through strong capital expenditure given the private sector’s disinterest in doing so.
A much-watched propeller of growth is consumer demand, not merely because of its large economic share but because of its anticipated response to lower GST which directly impacts consumption. Signs of its upliftment are tentative as observed from the early results of companies for the October-December quarter when the prices of many goods declined following the GST reductions. Most pioneer firms, notably the consumer-focused ones, recorded lower-than-expected earnings, raising doubts about consumption growth. A conclusive reading must wait.
There are other factors weighing upon consumption. The wealth effect from a soaring stock market for several consecutive years is winding down; equity price gains have slowed. The risks of price corrections have risen from disappointing earnings of the listed firms on the domestic side and the repricing of tech stocks abroad as flagged by the International Monetary Fund in its World Economic Outlook last week. A sudden, steep stock market correction would worsen the consumption outlook. The burden of debt service upon household incomes or interest repayments persists. Then, the depression in agriculture prices could weigh on rural incomes — consumers here have benefited from good monsoons and lower inflation but a solid upturn in rural consumption is not confirmed.
India’s exports have suffered less than initially feared in the tariff aftermath. This owes to the remarkable strength of the global economy, which grew a surprising 3.3% in 2025 according to IMF estimates. This is explained by “technology investment, fiscal and monetary support, accommodative financial conditions, and private sector adaptability”, which together countered the trade policy shifts and uncertainties. Moreover, world economic output will retain a similar pace in 2026 too. It is good if the forecast plays out undisrupted — the IMF underlined the rising risks from the concentration of tech investments and a cumulative negative impact of trade disturbances.
The effects of these uncertainties are profound, especially upon investments. No business can plan and incur risk in such an environment. For India, stronger private sector investment is the most critical to turn around economic prospects. Producers already confront the absence of visible home demand, a repeated refrain of the Indian industry. This implies that only a substantial and enduring pickup in consumption would justify investment and risk-taking. External demand conditions are uncertain too. In fact, the high uncertainty about future prices and markets is a threat to even existing production lines — due to raised tariffs, for example, some US importers are reported to be reluctant to contract imports from India, illustrating the cascading investment effect.
In the end, what the Goldilocks setup needs is strong consumer demand that can ignite an investment reaction, offset the ebbing role of government capex, and even alleviate a possible slowdown of exports. Backed further by the return of foreign capital inflow, including direct investments, the positive spinoffs would be greater policy space and flexibility. It remains to be seen if 2026 can deliver. Happy New Year.
Renu Kohli is Senior Fellow, Centre for Social and Economic Progress. Views are personal