Strong Economic Performance Masks Deeper Issues
India’s economy is on track to end the financial year with a growth of 7.3%, exceeding $4 trillion (£2.97 trillion) in GDP, and overtaking Japan as Asia’s second-largest economy. Retail inflation remains below 2% and is expected to stay under the central bank’s target in the coming months. Key sectors such as agriculture have seen robust output, with strong cereal production and well-stocked government granaries supporting rural incomes. Additionally, tax cuts and GST rationalization have boosted consumer demand, leading to increased spending. The Reserve Bank of India (RBI) has referred to this period as a “Goldilocks” phase, describing the economy’s balanced growth with low inflation.
Labour Market Weakness Despite Strong Growth
Despite the strong headline growth figures, India faces underlying challenges, particularly in the labour market. While the government claims unemployment is falling, the demand for gig work continues to rise, signaling instability. India’s five largest IT companies, which have traditionally been major job creators, added only 17 net employees in the first nine months of 2025. This indicates a slowdown in hiring, particularly in the software sector, which has historically been a key driver of India’s middle class. The impact of artificial intelligence (AI) on the back-office economy is further disrupting this sector.
Challenges in Export Growth and Trade Relations
India’s export sector is also under strain, particularly due to the ongoing trade tensions with the United States. The 50% tariffs imposed by the US have led to a weakening of exports, with trade to the US declining. Exports to other regions have only marginally improved, according to HSBC Research. While India has been diversifying trade relationships, including signing free trade agreements (FTAs) with the European Union, analysts note that India faces stiff competition from other low-cost countries such as Vietnam and Bangladesh in non-US markets.
Private Investment Remains a Concern
A major long-term challenge for India remains weak private investment. Corporate investment has stagnated at around 12% of GDP since 2012. JP Morgan’s Jehangir Aziz highlighted the lack of new investments, driven by excess factory capacity and insufficient demand. Foreign investment in India has also been low, with the country’s foreign direct investment (FDI) remaining well below that of other rapidly growing Asian economies like China and Vietnam. While the government has made strides in updating labour codes to improve the business environment, it remains unclear if these reforms will be enough to attract significant foreign capital.
Budget Expectations Focus on Reform and Fiscal Restraint
As India prepares for its 2026 budget, Finance Minister Nirmala Sitharaman is expected to emphasize two key pillars: continued reforms and fiscal restraint. Analysts anticipate an expansion of the production-linked incentive scheme to boost domestic manufacturing and support for MSMEs and exporters. There may also be a focus on increasing capital expenditure for defense and lowering customs duties to spur export growth. Over the past four years, the government has invested more than $100 billion annually in infrastructure, and this trend is expected to continue.
Fiscal Deficit and Tax Challenges
However, fiscal challenges loom. The government’s tax shortfalls are expected to widen, following the income tax and GST cuts of the previous budget. As a result, the focus will likely be on maintaining or reducing the fiscal deficit, with a continued focus on reducing the debt-to-GDP ratio. A significant stimulus is unlikely, as the government remains committed to deleveraging and controlling fiscal expansion.
Featured image credits: Flickr
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