The Indian Economy at a Crossroads, Navigating Global Turmoil and the Quest for Self-Reliance

The Indian Economy at a Crossroads, Navigating Global Turmoil and the Quest for Self-Reliance

The release of India’s *Economic Survey 2025-26* is not merely an annual statistical ritual; it is a profound philosophical and strategic document released at a moment of exceptional global peril. As analyzed by Sudipto Mundle, the survey grapples with a central, existential question: Can India sustain, let alone strengthen, its high-growth trajectory in a world experiencing its highest degree of uncertainty since World War II? This current affair moves beyond quarterly GDP figures to interrogate the very foundations of India’s economic model, its vulnerabilities, and its strategic choices in an era where geopolitics is increasingly trumping economics. The survey’s answer, anchored in a modernized doctrine of “self-reliance,” offers a compelling but contentious blueprint for navigating a turbulent world.

The Global Context: A World Unmoored

The survey’s backdrop is one of profound systemic disruption. Global uncertainty, already elevated by the pandemic, supply chain realignments, and the war in Ukraine, has been catapulted “to a whole new level” by the second term of Donald Trump as U.S. President. His policies—characterized by aggressive protectionism, transactional alliances, and a willingness to dismantle post-war multilateral institutions—have effectively “upended the global economic and geopolitical order.”

In this neo-mercantilist environment, the traditional rules of engagement are suspended. As the survey astutely notes, capital flows are no longer dictated by “sound macro-fundamentals and trade efficiency, but by geopolitics and strategic alliances.” This is a paradigm shift of the first order. For an emerging market like India, which relies on foreign capital to finance its manageable but persistent current account deficit, this introduces a new and potent risk: capital flight driven not by domestic mismanagement, but by external strategic calculations. The rupee’s depreciation of over 6% in the preceding year is a stark early warning of this vulnerability.

India finds itself in a paradoxical position. It boasts impressive domestic strengths: a projected 7.4% growth rate, low inflation, a strong fiscal consolidation path, massive public infrastructure investment (a key driver of recent growth), robust banking health, and substantial foreign exchange reserves. These fundamentals have rightly earned the nation credit rating upgrades. Yet, on the global strategic chessboard, the survey laments that India is “punching below its potential,” citing the Lowy Institute’s Power Gap score of -4. This gap between economic performance and geopolitical heft is the core dilemma the survey seeks to address.

Scenarios for a Fractured World: From Turmoil to Catastrophe

The survey’s methodology reflects the new age of uncertainty. It eschews a single, linear forecast in favor of three probabilistic scenarios:

1. Scenario 1 (40-45% probability): A continuation of current trends with gradually rising uncertainty. This is a “muddle-through” world of persistent tensions without catastrophic breakdown.

2. Scenario 2 (40-45% probability): A significant intensification where geopolitical tensions spike, global institutional “shock absorbers” (like the IMF, WTO) weaken further, and nations face sharp trade-offs between autonomy, growth, and stability in a climate of “hyper-nationalism.”

3. Scenario 3 (10-20% probability): A catastrophic economic breakdown—a scenario of outright fragmentation, conflict, or systemic collapse.

The critical takeaway is that in all three scenarios, India is seen as “relatively well placed.” Its large domestic market provides an innate buffer against external demand shocks. Its “less financialized” growth model (compared to, say, the pre-2008 US or UK) makes it less susceptible to the violent asset bubbles and contagion of global finance. Its forex reserves are a vital war chest. This relative insulation grants India a degree of strategic autonomy—the ability to make choices somewhat independently of global pressures.

However, the survey is clear: autonomy is not invulnerability. No amount of reserves can fully insulate India from disruptive capital flows and the consequent pressure on the rupee. The question then becomes: how does India leverage its autonomy to not just survive but thrive?

The Pillars of the New Strategy: Fiscal Prudence, Manufacturing Push, and Modern Self-Reliance

The survey’s policy prescriptions are built around reinforcing strengths and mitigating critical weaknesses.

• Fiscal Policy: The Double-Edged Sword: The survey applauds the central government’s sustained fiscal consolidation and infrastructure focus—a proven growth catalyst. However, it sounds a loud alarm on deteriorating state finances. “Falling expenditure quality,” rising unconditional transfers (like freebies), and persistent revenue deficits in several states are identified as key risks. They hurt investor confidence and, crucially, drive up the cost of capital for the entire economy. This is linked to another structural flaw: the persistent current account deficit, which raises India’s risk premium in global debt markets. Thus, fiscal responsibility is framed not just as a virtue, but as a strategic necessity to lower the cost of capital and boost competitiveness.

• The Primacy of Manufacturing: A Strategic Pivot: This is perhaps the survey’s most significant, and debated, strategic choice. It acknowledges the stellar role of service exports (especially IT) in narrowing the trade deficit but labels them “fragile.” In a world of data localization, digital sovereignty, and AI-driven disruption, service exports are seen as vulnerable. In contrast, manufactured goods exports are perceived as offering more durable value creation and employment linkages.

  This leads to a nuanced industrial policy. The survey rightly critiques the protection of “upstream” industries (like steel, chemicals), which simply raises input costs for “downstream” manufacturers, making them globally uncompetitive. Instead, it advocates a downstream-focused strategy: providing policy support (presumably in production-linked incentives, ease of doing business, trade logistics) to final goods manufacturers to help them face “global hyper-competition led by an export-dominated China.” This is a shift from protecting domestic industry from competition to empowering it for competition.

• Self-Reliance Reimagined: From Autarky to Resilience: The theme of “self-reliance” (Atmanirbharta) consciously evokes India’s post-independence planned development era. However, as Mundle notes, the substance is utterly transformed. The 1950s version was inward-looking, focused on import substitution behind high tariff walls. The 2025 version is outward-oriented and synonymous with resilience. It is about building diversified supply chains, deep domestic capabilities, and strategic buffers (like food and energy security) not to withdraw from the world, but to engage with it from a position of strength and reduced vulnerability to “geopolitical shocks.” It is self-reliance for security, not for isolation.

Critical Intersections: AI, Urbanization, and the Entrepreneurial State

The survey’s depth is highlighted in its treatment of cross-cutting themes:

1. AI and the Future of Work: A dedicated chapter on Artificial Intelligence moves beyond hype to grapple with its disruptive potential for India’s services-led growth model and its vast workforce. The imperative is adaptation—skilling, regulatory frameworks, and fostering AI innovation—to turn a threat into an opportunity.

2. The Urban Imperative: Recognizing that cities are the engines of modern economic growth, the survey focuses on urbanization. The challenge is to move beyond chaotic, unplanned growth to creating efficient, livable, and productive metropolitan economies that can drive the next phase of development.

3. The State vs. The Citizen: A Question of Time Horizons: In a deeply insightful section, the survey frames a tension between the “entrepreneurial state” investing for the future and citizens (and thus politicians) demanding immediate gratification through welfare and subsidies. It poses a choice between “immediate versus future gratification.” As Mundle gently critiques, this is a luxury of choice not available to the “undernourished and underemployed,” for whom a social safety net is a prerequisite for survival. The survey hints at, but does not fully resolve, the need for a “middle path” that balances imperative long-term investment with compassionate short-term support.

The Unanswered Questions and the Road Ahead

The *Economic Survey 2025-26* is a masterful diagnosis and a bold prescription, but it leaves critical questions on the table.

• The Employment Conundrum: By privileging manufacturing-led GDP growth, does the strategy adequately address India’s colossal employment challenge, especially when modern manufacturing is increasingly capital- and skill-intensive?

• The Social Contract: Can the “middle path” between future-oriented investment and present-day welfare be clearly defined and sustainably financed, especially by fiscally stressed states?

• Geopolitical Agility: How does India operationalize its “strategic autonomy” to attract geopolitically driven capital in a bifurcating world? This requires diplomatic finesse beyond economic policy.

• Implementation Gordian Knot: The best-laid plans founder on the rocks of implementation. Can the Indian state—across the Centre and states—execute this complex, coordinated vision with the required efficiency and minimal corruption?

Conclusion: A Defining Moment for the Indian Model

The *Economic Survey 2025-26* is more than a document; it is a manifesto for a nation at an inflection point. It argues that in a world reverting to power politics and economic blocs, India cannot afford to be a passive participant dependent on the whims of global capital. It must actively shape its destiny by doubling down on macroeconomic stability, making a strategic bet on competitive manufacturing, and building systemic resilience.

The path it outlines is arduous and requires difficult trade-offs, particularly between fiscal discipline and social spending, and between welcoming global value chains and nurturing domestic champions. It is a path that demands political courage and administrative competence of a high order.

Ultimately, the survey posits that India’s high-growth story can continue, but not on autopilot. It must be actively secured through a conscious, assertive, and modern form of economic statecraft. The choice, as framed, is between leveraging India’s inherent strengths to build a resilient, self-reliant powerhouse, or risking being buffeted and diminished by the storms of a disordered world. The coming years will reveal which path India truly chooses to walk.

Q&A on the Economic Survey 2025-26

Q1: What is the “central theme” of the Economic Survey 2025-26, and why is it so critical at this moment?
A1: The central theme is whether India can sustain its high economic growth in a world of unprecedented uncertainty, the highest since World War II. This is critical because global turmoil, exacerbated by geopolitical shifts like Donald Trump’s second term, has upended the traditional rules of global economics. Capital flows are now driven by geopolitics, not just fundamentals, exposing India’s vulnerability due to its current account deficit. The survey interrogates India’s growth model in this new, dangerous context, making it a document about national economic survival and strategy, not just routine analysis.

Q2: How does the survey assess India’s position in the face of global uncertainty, and what key vulnerability does it highlight?
A2: The survey assesses India as “relatively well placed” due to its strong macroeconomic fundamentals, large domestic market, less financialized economy, and large forex reserves, which grant it strategic autonomy. However, it highlights a critical vulnerability: the risk of disruptive capital flows. Despite good fundamentals, India’s persistent current account deficit makes it reliant on foreign capital. In a geopolitically-driven world, this capital can flee for strategic reasons unrelated to India’s performance, leading to rupee depreciation and economic instability—a risk exemplified by the rupee’s 6% drop last year.

Q3: What is the survey’s rationale for prioritizing manufacturing exports over services exports, and what specific industrial policy does it recommend?
A3: The survey argues that while service exports (like IT) have been strong, they are “fragile” in a world of digital sovereignty and AI disruption. Manufactured goods exports are seen as offering more durable value and employment. Its recommended industrial policy is downstream-focused. It criticizes protecting upstream industries (e.g., steel) as it raises costs for downstream manufacturers. Instead, it advocates policy support for downstream, final-goods manufacturers to help them compete globally, especially against China, thereby strengthening the export ecosystem from the finished product end.

Q4: How does the concept of “self-reliance” in the survey differ from its historical meaning in Indian policy?
A4: Historically, post-independence “self-reliance” was synonymous with inward-looking import-substitution industrialization (ISI), high tariffs, and economic autarky. The survey’s modern “self-reliance” is outward-oriented and fused with the concept of resilience. It is not about isolating from the global economy but about building domestic capacity, diversified supply chains, and strategic buffers to engage with the world from a position of strength and reduced vulnerability to geopolitical and environmental shocks. It’s self-reliance for security in interdependence, not for isolation.

Q5: What tension does the survey identify regarding the role of the state, and what is the critique of this framing?
A5: The survey frames a tension between the “entrepreneurial state” investing for long-term growth and citizens/politicians seeking “immediate gratification” through welfare and subsidies. It poses this as a choice between future and present consumption. The critique, as noted by Sudipto Mundle, is that this is a false choice for millions of “undernourished and underemployed” citizens for whom immediate social safety nets are a prerequisite for survival, not a luxury. The survey hints at but does not resolve the need for a “middle path” that balances crucial long-term investments with essential short-term welfare support.