The turbulence of 2025 was characterised by geopolitics yet again, besides technology and reordering global trade and capital flows.
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What began as threats of higher tariffs evolved into a firmer barrier against India’s exports to US. Indian exporters responded by pre-shipping orders and redirecting goods to alternative markets, strategies that helped them avoid the worst impact for a good part of the year.
Service exports, India’s quiet strength, came to the rescue again.
But the year ended on a slightly difficult note on the external front. Exports to the US have declined, while overall goods exports are slowing.
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The rupee’s sharp fall was another symptom of the global churn (and not domestic weakness) as it nosedived against an already weak dollar, reflecting exit of foreign capital following imposition of 50% tariff by the US and the lure of AI-investment opportunities elsewhere.
Yet, the domestic economy held its nerve.
Benign crude oil prices—India imports 150 million barrels each month, comprising close to a quarter of its total import bill—offered relief.
Food prices, long a source of discomfort due to recurring climate shocks, eased, creating monetary policy space to support growth.
The Reserve Bank of India responded by cutting the repo rate by 125 basis points (bps) and the banks’ cash reserve ratio requirement by 100 bps providing impetus to lending activity in the economy.
Fiscal support measures – income tax relief and reduction of goods and services tax (GST) on mass consumption items – were also pressed into service. Combined with efforts to expand credit, these helped sustain household consumption demand, creating conditions for the private corporate sector to consider capacity expansion.
Healthy agriculture output after abundant rains strengthened rural purchasing power, adding another pillar of support.
These buffers of strength should support in 2026 as well even as the troika of pressures that triggered volatility and uncertainty last year, continue to linger.
It is against this macro background that this year’s budget must be framed, one that is likely to differ from the previous budget on at least four counts.
First, the fiscal consolidation drive is likely to be gentler. The Centre is already at its fiscal deficit target, so further reduction beyond this – with a view to bring down debt levels – the new goal post – will be incrementally smaller. For context, fiscal deficit was brought down by 3.3 percentage points of GDP between fiscals 2021 and 2024, whereas the following two years saw a 1.5 percentage points reduction to the current 4.4%.
Second, while public capex will continue, the budget will also need to take measures to crowd in private investment through incentives.
Third, an additional consumption stimulus may be unnecessary at this juncture. The effects of tax reliefs announced in the last budget and the mid-year GST reduction are still unfolding. States, too, have upped their welfare spending via direct benefits transfer to the public. Moreover, data so far suggests a revenue shortfall this year due to the tax cuts and weaker-than-expected nominal GDP growth. The budget will thus be mindful of additional strain on its finances.
And fourth, exporters will require some support. The US tariff punch could get harder now as the full impact of higher tariffs percolates. Moreover. with the EU’s Carbon Border Adjustment Mechanism (CBAM) coming into effect, India’s exports to the region will get expensive – leading to further thinning of exporter margins.
The policy approach, therefore, will need to be two-pronged – incentivise faster move towards decarbonization since the non-tariff barrier from CABM is here to stay and fast track trade deals as global trade volumes are estimated to remain near-stagnant this year.
Growth will be shaped by policy measures already set in place last year. We expect GDP growth to moderate to 6.7% in fiscal 2027, driven by healthy consumption and a mild revival in private investment.
Besides a high base, moderating government capex is expected to pull growth.
Consumption should derive support from low interest rates and improved disposable incomes owing to tax cuts.
Inflation, meanwhile, should tick-up towards 5% given an extremely low base, benign oil prices and continued impact of GST rate cuts.
This budget will, therefore, perhaps matter less for numbers and more for the direction it provides.
The author is Principal Economist at Crisil. Views are personal.