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Budgeting For A Fractured World
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Good Morning. As Finance Minister Nirmala Sitharaman prepares to table the 2026 Union Budget this Sunday, the Economic Survey 2025-26 has set the stage with "measured optimism." While the survey projects domestic resilience, the Budget needs to consider that India must survive when the global order has been upended by Trumpian policies.
India’s equity benchmarks closed higher on Thursday, the third straight session. The BSE Sensex closed at 82,566.37, gaining 221.6 points or 0.27%. The NSE Nifty50 closed at 25,418.90, gaining 76.15 points or 0.3%.
In other news, the Economic Survey flags capital inflows as a key vulnerability for India. Meanwhile, India’s textile industry finds hope in the India-European Union (EU) trade deal.
Budget Must Prepare India for Fractured World Despite Economic Survey Optimism
The Economic Survey 2025-26 tabled in Parliament on Wednesday presents a hopeful picture of India’s growth over the remainder of the decade, accelerating to an average of 7%, despite adverse and volatile global developments.
The global developments are summarised as: intensifying geopolitical conflicts, weaponisation of energy and finance, export controls on technology, scepticism about free trade, and competition for critical minerals (this should have been described more accurately as constrained availability of critical minerals to those who cross China).
How Must India Respond?
These global challenges cannot be considered a fleeting aberration. The Donald Trump administration in the US has fundamentally damaged the world order as it stood from the end of World War II to the beginning of 2021.
Trump’s attack on American democracy, immigration and trade as the world knew it, has undermined the dollar and US government bond as the anchor of global finance.
India is no longer a reliable partner for the US, and the US is no longer a reliable partner for India. India has to cooperate, where possible, with the world’s second-most powerful economy and military power, China, while also gearing up to face any conflict with that country.
As such, these global trends call for a concerted and sizeable response from India. Will the Budget mark the beginning of such a response, or will it muddle along as usual?
Here’s what India needs to do:
— India’s armed forces and their arsenal have to be strengthened considerably. India has to step up defence spending and procure a rapidly rising share of sophisticated defence kit from the domestic industry. To this end, the government has to take strong measures to harness India’s robust potential for research and development (R&D).
— The Economic Survey laments the private sector’s reluctance to undertake R&D. Of the measly 0.64% of GDP that the Survey says India spends on R&D, the private sector contributes only 41%, that is, 0.26% of GDP. Ideally, the Budget should announce a tax incentive for income derived from intellectual property developed by a company.
— During the extensive conversations The Core has had with India’s hydrocarbon majors over the India Energy Week, bosses of the gas pipeline major GAIL and city gas company IGL asserted their plans to expand the pipeline network to bring more and more cities, and even smaller towns, under the coverage of piped natural gas distribution as cooking fuel for homes. Another major use of piped natural gas is to deliver compressed natural gas as fuel for vehicles. From a long-term perspective, massive investment in piped gas is a mistake.
India should be cooking on electricity, not liquefied petroleum gas or natural gas. Electricity should power mobility, as well, with greater emphasis on public transport than on private vehicles.
How can that happen?
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6.8-7.2%
That’s the growth range the government has projected for India’s economy in FY27, signalling steady expansion even as global volatility becomes a permanent feature. The forecast marks a slowdown from this year’s 7.4% pace, but reflects confidence in domestic demand, public investment, and the health of the financial sector.
Catch Up Quick: The Economic Survey argues the rules-based global order has fractured, making uncertainty structural rather than cyclical. It sketches three likely global scenarios for 2026 — from “managed disorder” to a disorderly multipolar breakdown — all marked by politicised trade, volatile capital flows and weaker coordination.
Fast Facts: Across scenarios, India’s key vulnerability is disruption to capital inflows and pressure on the rupee. The survey also flags leveraged AI investment as a potential new source of financial stress.
What’s Next? Strong growth alone no longer guarantees stability. The Survey calls for resilience over speed, urging India to build policy credibility, buffers and liquidity. Manufacturing is seen as critical for currency stability and export resilience, while services, though stabilising, cannot provide system-wide insurance.
Experts Say: "The Economic Survey reinforces the view that India’s growth potential has improved to around 7% due to sustained reforms and measures to boost manufacturing competitiveness. However, it also makes clear that heightened geopolitical uncertainty remains a key risk, and that strong manufacturing growth is critical to building external resilience," said Dipti Deshpande, principal economist, Crisil.
Airbus Sees India Boom
Airbus said Indian airlines are expected to triple the size of their fleets to about 2,250 aircraft over the next decade, driven by economic growth, a rising middle class and more first-time flyers. The outlook follows a Boeing forecast that carriers in India and South Asia will need nearly 3,300 new aircraft by 2044, underscoring the region’s importance for planemakers.
Context: According to Reuters, India is the world’s third-largest domestic aviation market, led by IndiGo and Air India, but remains underpenetrated, with trips per capita at just 0.13, Airbus said. That leaves significant room for growth as airlines expand capacity and retire older jets.
Lead: Airbus added that some aerospace services could benefit from lower tariffs following the India-EU trade agreement.
Textile Exporters Eye EU
India’s textile and apparel exporters, reeling under massive US tariffs, are pinning their hopes on India’s trade deal with EU, Reuters reported. The sector was the worst hit by the 50% US tariffs imposed in August 2025, prompting exporters to urge New Delhi to quickly conclude a trade deal with Washington.
By The Numbers: Under the India–EU pact, expected to take effect in about a year, the EU will remove duties on 90% of Indian goods, including the roughly 12% tariff on textiles and apparel. US shipments fell more than 50% in October–December from the previous quarter for nearly one-quarter of exporters, industry surveys showed, with potential losses estimated at $5–$6 billion this year without relief.
Fast Facts: India’s textile exports held at $37.5 billion in 2025 as firms diverted shipments to the EU and other markets, though the US remains its largest buyer.
Much Ado About Imports?
India’s proposed auto trade deal with the European Union will have a limited impact on domestic carmakers, according to a report by Kotak Institutional Equities. The brokerage said Indian manufacturers face little risk because the duty cuts apply to a narrow set of imported vehicles and exclude mass-market price bands.
The Lead: Most European mass-market brands already manufacture over 95% of their India volumes locally, sharply limiting any price impact. Luxury carmakers may cut prices on 5-10% of their models, but even after reductions, most vehicles will continue to cost over Rs 50 lakh.
Future: Passenger vehicle stocks of Indian carmakers fell after the trade deal raised fears of cheaper European imports. Kotak said the sell-off overstates the risk, as the duty cuts apply only to a small pool of high-priced vehicles and leave domestic mass-market segments largely untouched.
More Than Macros
India’s Chief Economic Adviser (CEA) V Anantha Nageswaran said India is “an oasis of macro stability” despite rising global volatility and trade fragmentation.
Catch Up Quick: He added that inflation remains benign, easing pressure on households and policymakers even as external risks grow. Nageswaran cautioned that the long period of ultra-low global interest rates after 2008 distorted asset prices, encouraged excessive risk-taking and concentrated capital in a narrow set of assets, leaving financial markets more vulnerable to shocks. He called on the private sector to look beyond short-term profits and invest in jobs to sustain social trust.
The Shift: Separately, the CEA suggested India consider age-based limits on social media access to curb digital addiction and reduce harm to children and teenagers.
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On Episode 787 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Kedia, Director at Kedia Commodities, Himanshu Sinha, Head of Tax Practice at Trilegal as well as Shankkar Aiyar, veteran economic journalist and author.
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