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India prepares for annual budget amid robust economic indicators
As Finance Minister Nirmala Sitharaman prepares to unveil India's annual budget this Sunday, the nation's economy presents a mixed picture. While headline figures show impressive growth, underlying structural issues persist.
Economic growth and stability
India is projected to close the current financial year with a 7.3% growth rate, surpassing $4 trillion in GDP and overtaking Japan as Asia's second-largest economy. Retail inflation remains below 2%, staying within the central bank's target range for the coming months. Strong agricultural output, particularly in cereal production, has bolstered rural incomes, while last year's income tax cuts and streamlined Goods and Services Tax (GST) have stimulated consumer spending.
The Reserve Bank of India (RBI) has described this phase as a "Goldilocks" scenario-an economy expanding at an optimal pace with steady job growth.
Hidden challenges in the labor market
Despite official claims of declining unemployment, demand for precarious gig work remains high. India's top five IT firms, historically major job creators, added a net total of just 17 employees in the first nine months of 2025. This hiring freeze in the software sector, a cornerstone of India's middle-class growth since the 1990s, underscores the disruptive impact of AI on the country's back-office economy.
The slowdown in white-collar hiring coincides with ongoing struggles in labor-intensive export industries, further straining the job market.
Trade tensions and export struggles
India enters 2026 under the shadow of U.S. tariffs, which have persisted longer than anticipated. While the government has aggressively pursued trade diversification-including a recent free trade agreement (FTA) with the European Union-export growth has faltered.
"Exports to the U.S. have weakened since the 50% tariff was imposed, while growth in other markets has been marginal,"
HSBC Research
Analysts warn that FTAs alone may not be sufficient. Competing with countries like Vietnam and Bangladesh in non-U.S. markets will require improvements in quality, pricing, and scalability.
Stagnant private investment and foreign capital
Economists highlight another long-standing concern: sluggish private investment. Jehangir Aziz of JP Morgan noted that corporate investment has "flatlined since 2012," remaining at around 12% of GDP. Excess factory capacity, driven by weak demand, has deterred new investments.
Ruchir Sharma, chair of Rockefeller International, pointed to broader weaknesses, including foreign investors withdrawing capital from India. He attributed this trend to persistent bureaucratic hurdles, such as the lingering effects of the "Licence Raj," which complicate land acquisition and labor flexibility.
"Asian economies that sustained rapid growth, like China and Vietnam, saw foreign direct investment surge above 4% of GDP during their boom phases. In India, this figure never exceeded 1.5% and now stands at just 0.1%."
Ruchir Sharma, Financial Times
Budget expectations: Reforms and fiscal discipline
Against this backdrop, Sitharaman is expected to prioritize two themes in Sunday's budget: further reforms and fiscal restraint. Analysts anticipate an expansion of the production-linked incentive scheme to boost domestic manufacturing, along with targeted support for micro, small, and medium enterprises (MSMEs) and exporters.
Nomura analysts Sonal Verma and Aurodeep Nandi suggested potential measures, including increased capital expenditure for defense and reduced customs duty slabs to stimulate exports. The government's infrastructure push-with over $100 billion spent annually on roads, railways, and telecoms in the past four years-is likely to continue, with capital expenditure maintained at 3% of GDP.
However, last year's tax cuts and GST rationalizations, which amounted to 0.9% of GDP, have widened fiscal shortfalls. The government is expected to focus on deficit reduction or stabilization, with Nuvama Securities forecasting no major stimulus as authorities aim to reduce the debt-to-GDP ratio by 1% annually until FY31.
