By NK Singh & Nicholas Stern
In an earlier article (“History doesn’t end today, our old compass has run its course”, IE, December 31, 2025), we examined India’s policy challenges in an unsettled global environment. This article revisits that framework. Assessing the Union Budget against the templates we had outlined, we find that it has been marked by much greater openness to recognising trade as an engine of growth. The Finance Minister’s mantra this year has been capital, technology, and export competitiveness. This philosophy was behind the trade agreements with the EU and the UK, as well as Australia, the UAE and Oman.
Global Trade and Geopolitical Challenges
Yet, geopolitical uncertainty has intensified debates on inflation and growth, capital flows, currency management, and India’s attractiveness as an investment destination. The US and China deploy tariffs, export controls, and licensing regimes, while restrictions on advanced technologies signal a fragmented order.
The Economic Survey cautions that a persistent current account deficit (CAD) raises India’s macro risk premium and keeps interest rates elevated. But eliminating the CAD of 1.3% of GDP in Q2 FY26 by running down reserves would be counterproductive. India has sustained larger deficits in the past while maintaining adequate reserve buffers. During the chairmanship of the FRBM Review Committee, we placed sustainable CAD at around 2.3% of GDP.
While real activity outpaces nominal growth, revenue buoyancy has weakened even as fiscal demands intensify. This strains the exchequer at a time when debt sustainability and macroeconomic management are becoming more binding. The challenges of India’s “Goldilocks” economy call for the following blueprint.
Fiscal Credibility and Private Investment: Balancing Act
First, fiscal credibility must be judged not only by headline deficit reduction but by the composition and economy-wide effects of public spending. The Centre’s adjustment since FY21 has been substantial, with the deficit reduced from 9.2% of GDP to 4.8% in FY25 and 4.4% for FY26. Public capex has risen to Rs 11.21 lakh crore, while the general government debt-to-GDP ratio has declined by over seven percentage points. GST provides a new source of information as well as revenue, and encourages movement from informal to formal. Yet the fiscal stance must also be assessed against the domestic savings constraint. Government borrowing absorbs a large share of net household financial savings, which corporations no longer rely on. The shift in household savings towards greater risks on the stock market could raise borrowing costs rather than larger deficits. This is particularly relevant for manufacturing and smaller firms, where the cost of capital remains elevated. Fiscal discipline must crowd in private investment rather than pre-empt it. Public investment in efficient and clean infrastructure can open up opportunities for new private investment.
State Finances and Cooperative Fiscal Federalism
Second, state finances reinforce this concern. State deficits have risen since FY22, reaching around 3.2% of GDP in FY25, while state debt remains close to 28% of GDP. In integrated sovereign debt markets, sub-national slippages raise borrowing costs for all. Cooperative fiscal federalism must move beyond transfers towards shared discipline and credible rules.
Third, private investment remains the bridge between macroeconomic stability and sustained growth. The Centre is leading by example with additional grants of Rs 1.6 lakh crore to raise states’ capex. States must play a larger role, though capex cannot remain the primary growth engine. The investment rate has stabilised near 30% of GDP, corporate balance sheets have strengthened, and capacity utilisation has improved. The Budget emphasises simplified regulations, faster contract enforcement, and lowering the economy-wide cost of capital.
Cities, Human Capital, and Competitiveness: Shaping Future Growth
Fourth, competitiveness and trade access are increasingly shaped by climate. Industrial GVA grew by 7% in the first half of FY26, with medium- and high-technology manufacturing accounting for nearly half of this. The Budget strengthens competitiveness through rationalised customs duties, correction of inverted duty structures, faster MSME payments, and stronger private R&D. Climate risks to manufacturing now need to be addressed directly. Reducing emissions from cement and steel, supported by the Budget’s focus on carbon capture utilisation and storage, will be good for India while enabling exports to Europe and elsewhere.
India must preserve atmanirbharta while deepening ties with trusted partners, particularly in the Asian economy. Call it Carney-ism: A blunt warning that we are living through a rupture, the old order is dead, and the transition disorderly. Influence will accrue to those capable of forming agile alliances across trade, energy, and security. The challenges will include finance, investment, energy, climate, biodiversity and security. The Budget implicitly acknowledges these as it seeks to protect growth.
Finally, human capital and cities will determine whether growth remains durable. India’s workforce exceeds 56 crore, unemployment has declined to 4.8%, and female labour force participation has crossed 41%. AI is expected to lift productivity, with the Economic Survey projecting total factor productivity growth of 1.9% annually.
Cities generate a disproportionate share of output and FDI. The FM’s Budget speech highlighted the development of City Economic Regions (CERs), with funding of Rs 5,000 crore per CER over five years linked to results. Between 2017 and 2025, municipal bonds—further incentivised in this Budget—raised Rs 2,834 crore. Property taxes now account for about 60% of urban local body revenues. Without stronger municipal finance and governance, India risks losing agglomeration benefits in labour absorption and capital attraction. Pollution and congestion are a major constraint on talent, investment, and growth. Urban infrastructure needs reforms that reduce emissions, manage mobility and improve service delivery. Stronger, cleaner public transport spurs inclusion and creates opportunities for poor people to benefit from urban growth.
In a harsher global environment, this Budget positions India not merely to grow, but to govern growth with judgement and resilience. We are in the classic Schumpeterian case, often associated with “creative destruction”. This Budget provides new opportunities for investing in the new and enhancing India’s creativity.
The authors are NK Singh, President of the Institute of Economic Growth, and Nicholas Stern, Chairman of the Grantham Research Institute on Climate Change & the Environment.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.