By Deepanshu Mohan
In 2025, India’s macroeconomic landscape was characterized by fluctuations. While many parts of the world faced economic slowdowns, India experienced a surge in growth. Inflation numbers were largely manageable within a challenging monetary policy framework, even amid currency volatility. Foreign exchange reserves remained strong despite significant outflows of Foreign Institutional Investment (FII). In a global environment marked by crisis management, India navigated through 2025 with a rare calm that didn’t translate into a contraction.
With the Union Budget for 2026-27 set to be unveiled on February 1, the key question shifts from how effectively India managed the past year to the nature of the economic framework established to foster prosperity for all. This aspect of shared economic growth deserves a closer examination.
Data reveals that real GDP growth accelerated to 8.2 percent during the July-September quarter, while consumer price inflation remained low at just 1.8 percent in July and August. Additionally, foreign exchange reserves surpassed USD 690 billion, sufficient to cover over 11 months of imports. However, periods of economic calm often warrant deeper scrutiny, and 2025 might be remembered as the year India mastered stability yet encountered its own limitations.
Stability alone is not a comprehensive growth strategy aimed at fostering higher and more inclusive prosperity. India’s recovery in 2025, while genuine, was notably narrow compared to previous high-growth phases, which were fueled by investment surges. This recovery primarily leaned on consumption and services, with Private Final Consumption Expenditure rising roughly 7.0 percent in the first quarter of the fiscal year. Although service exports flourished, surpassing net receipts of USD 50 billion, private investment did not follow suit with equal fervor. Corporate profits reached a 15-year high, yet total investment announcements were only USD 355.45 billion, a mere 39 percent increase from the previous fiscal year.
While consumption-led growth can yield impressive headline figures, it fails to broaden productive capacity. Without a sustained cycle of private capital expenditure, the economy risks operating below its potential. The ongoing reluctance to invest suggests deeper structural constraints rather than a temporary pause. When capital is predominantly channeled into consumption rather than industrial capacity, it typically results in increased debt rather than substantial wage growth.
Monetary policy has worked diligently within its constraints, with retail inflation easing to a five-month low of 4.31 percent in January 2025, down from 5.22 percent in December 2024. In response, the Reserve Bank of India (RBI) implemented significant liquidity measures, injecting around USD 40 billion through open market operations and forex swaps. Still, lending rates remained sluggish.
Credit growth averaged 11 to 12 percent but was largely focused on retail loans rather than long-term productive investments. This disconnect between policy rates and actual economic activity reveals that monetary constraints are no longer the core issue.
On the current account front, stability was maintained, with the deficit for FY25 contained at approximately 0.6 percent of GDP. The first quarter of the fiscal year even recorded a surplus exceeding 1 percent, driven by robust service exports and remittances, which together brought in over USD 80 billion quarterly.
However, the capital account saw significant outflows. Foreign institutional investors withdrew between USD 1.9 billion and USD 2.1 billion from Indian equities, marking the largest annual outflow on record, and the rupee depreciated over 5 percent against the dollar, becoming the weakest major currency in Asia.
The RBI’s response was measured; rather than defending a specific exchange rate, it focused on mitigating volatility, reflecting a strategic acceptance of the complexities involved in an open economy. With capital mobility and monetary easing in play, the exchange rate adjusted accordingly, allowing for a managed depreciation that bolstered export competitiveness without inciting disorder.
Trade policy also underwent a shift, albeit belatedly, to address long-standing macroeconomic trends. However, without improvements in logistics, compliance standards, and long-term finance access, trade agreements alone won’t revitalize manufacturing exports significantly.
Despite appearances of health, Indian banks remain vulnerable. Gross non-performing assets have fallen to around 2.6 percent, and public sector banks have recorded substantial quarterly profits exceeding USD 6.5 billion. This perceived stability has led to renewed calls for consolidating banks into larger entities. Yet, this stability often stems from risk aversion rather than effective credit allocation, with public sector banks holding a significant portion of their assets in government securities, often at levels exceeding regulatory requirements.
Such a reliance on sovereign assets connects bank stability to fiscal health. This creates a nexus that stifles credit growth and hampers the effectiveness of monetary policy. Even after substantial interest rate cuts, lending rates adjusted slowly due to deposit shortages and high credit-deposit ratios, which have surpassed 80 percent.
The consolidation of banks under these circumstances could amplify systemic risks rather than alleviate them. Larger banks lacking a deep corporate bond market or a credible resolution framework may become reservoirs of concentrated risk instead of drivers of economic growth. The challenge lies not merely in the size of these institutions but in their capital allocation strategies.
Financial resources are still heavily directed towards government securities and consumer spending rather than productive private investment. The upcoming budget must navigate this macroeconomic tension. With government capital expenditure nearing its fiscal limit and a deficit projected at 4.4 percent, private investment has yet to become the main growth engine. Stability has been achieved, but it risks becoming a constraint under a policy of risk aversion.
The transition from a USD 4 trillion to a USD 5 trillion economy won’t hinge on merely managing risks but rather on how effectively capital is utilized. The real test for the forthcoming budget will be its recognition of this critical distinction. If overlooked, 2025 may be viewed as a year when India refined its macroeconomic management while postponing genuine development.
Original Source: https://nenews.in/business/the-big-question-for-budget-2026/39399/
Category: Business,Budget 2026,Foreign Institutional Investment (FII)
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Publish Date: 2026-01-14 14:09:00
