In today’s Finshots, we break down the Economic Survey 2026 to understand where our economy stands and where it’s headed.

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Now onto today’s story.

The Story

Every year, a few days before the Union Budget, the finance minister releases another document that quietly sets the tone for everything that follows — the Economic Survey.

Think of it as the government’s annual report card. It’s the closest thing India has to an audit of its economy, covering everything from growth and inflation to fiscal health, trade deficits, and the risks lurking beneath the surface.

Now this year’s survey feels a lot like a warning rather than an assessment of how our economy did and will do, wrapped inside a package of good news.

The easiest place to start is the growth of the economy.

In our previous edition of the Economic Survey, it was estimated that our economy would grow at around 6.3% to 6.8% in FY26. Now despite tariffs and uncertainties or where the world economy was going, we held up strong with a solid 7% growth. That’s significantly higher than advanced economies like the US and Europe, which are growing at around 2%, higher than the average growth of developing economies at about 4%, and well above the global average of roughly 3%. That means that on paper, India’s growth looks remarkably strong, making it the fastest-growing major economy for the fourth year in a row, even as global trade slowed and tariff risks mounted.

If you’re wondering how, well, it’s tied to a few important domestic factors:

1. Consumption or people buying stuff

The Economic Survey points out that household consumption is doing much of the heavy lifting behind India’s growth. To put that in perspective, private consumption now accounts for 61.5% of GDP, the highest share since FY12. What really stands out is that in just the first half of FY26, consumption grew by 7.5%, faster than both last year and the pre-COVID average of about 6.9%. So why is this happening? For one, headline inflation covering essentials like food, fuel, and other household expenses, has cooled sharply, falling from 6.7% in FY23 to 1.7% in FY26 (up to December). In simple terms, people’s real incomes have gone up. A strong agricultural year has also helped, lifting rural demand, while urban consumption has begun to pick up as tax rationalisation in the previous Budget and lower GST rates leave more money in households’ hands.

2. Investment

Investment is the second big pillar supporting growth. Capital spending, which includes investments in machinery, factories, roads, and infrastructure, accounts for about 30% of GDP and has grown faster than both last year and the pre-pandemic average.

3. Exports

Although not the main driver, external demand has also helped. Exports of goods and services now make up about 21.6% of GDP and grew by 5.9% in the first half of FY26, faster than in the same period last year and above pre-pandemic trends. Particularly, something you can’t ignore is the services exports, which have been especially important in cushioning the economy against volatility in goods exports caused by tariff uncertainty.

4. Supply side drivers

What you’ve seen so far are the demand-side drivers. Basically, who is buying and how much they’re spending. But there’s also the supply side, which looks at who is producing and how much they’re producing. On that front, India’s growth is being powered mainly by industry and services, with agriculture providing steady support. Agriculture and allied activities are expected to grow by about 3.1% this year. That may not sound spectacular, but it’s an improvement over last year and enough to support rural incomes. Industry is picking up pace too, driven largely by manufacturing. As we explained earlier, consumption has gone up, so factories have to produce more to keep up. Still, the biggest driver remains services. Sectors like trade, transport, finance, and professional services are growing the fastest, pushing overall services growth to around 9%.

But despite all this good stuff, it hasn’t translated into stability. And that raises an obvious question: why don’t strong economic fundamentals inspire investor confidence the way they once did?

If you think about it plainly, a country with strong growth, controlled inflation, and fiscal discipline should, in theory, have a stable currency and attract steady capital inflows. That used to be the case. But the Economic Survey argues that this relationship is now weakening.

Consider the contradiction India faced in 2025. The Union government achieved a fiscal deficit (excess expenditure over revenue) of 4.8% of GDP, better than the budgeted 4.9%, and set a further target of 4.4% for FY26.

And yet, the Indian rupee underperformed through the year. In fact, just yesterday it slipped to an all time low of ₹92 against the US dollar. So, despite what the Survey calls “stellar economic fundamentals”, currency stability proved missing as foreign investors turned cautious.

The Survey is explicit in its diagnosis: in a world shaped by geopolitical rivalry, trade disruptions, and financial fragility, macroeconomic success alone no longer guarantees investor confidence or capital stability.

Why, you ask?

Let’s start with trade. In FY25, India sold a record $825 billion worth of goods and services to the rest of the world. And that momentum has continued this year too. Even though the US raised tariffs, India’s goods exports still grew by 2.4%, while services like IT, business services, and travel grew faster at 6.5%. At the same time, India bought more from abroad, with imports rising by 5.9%, which means the gap between what we buy and what we sell in goods widened. But this isn’t a big worry because India earns a lot from services and from money sent home by Indians working overseas. These inflows help balance things out.

The other thing though is capital flows. Foreign companies continued to invest in India, with gross FDI inflows rising 16.1% year-on-year between April and November 2025. But the net picture looks softer because Indian firms also invested more abroad, and foreign investors repatriated some profits. Portfolio investors were even more cautious. Up to December 2025, foreign portfolio investors pulled out $3.9 billion, compared to inflows of $10.6 billion in the same period last year, partly because global money chased AI-linked opportunities in markets like the US and Korea. All of this meant that India recorded a balance of payments deficit of $6.4 billion in the first half of FY26, compared to a surplus the year before, and this gap was funded by dipping into foreign exchange reserves.

This shift naturally showed up in the currency as mentioned earlier and as a result, between April 2025 and January 22, 2026, the rupee weakened by about 6.5% against the US dollar.

Another interesting thing to note here is that when global investors feel optimistic and cash flows freely across borders, this dependence on foreign inflows and investments doesn’t hurt much. But when the world turns cautious because of wars, trade disputes, or higher interest rates in rich countries, that foreign money slows down. And when it does, the pressure shows up first in the currency.

This vulnerability then spills into borrowing costs too. Because countries that rely on foreign money have to pay a kind of “confidence tax”. For context, even though India’s credit rating is similar to countries like Indonesia, investors still demand a higher return. India’s 10-year government bond yield, for instance, essentially the interest rate the government has to pay when it borrows money for ten years, hovered around 6.7%, compared to about 6.3% for Indonesia. In simple terms, this means investors see lending to India as slightly riskier, so they ask for a higher interest rate. This tells you that investors aren’t just asking how fast India is growing anymore. They’re asking how resilient it is when global money pulls back.

And that naturally raises the next question: why does India remain so dependent on foreign capital in the first place?

The answer lies in the structure of its exports. For years, services exports have quietly kept India stable. Since 2020, overall exports have grown at about 9.4% a year, with services growing faster than goods.

But the Survey argues that this model has limits. Services generate income, but they don’t reduce dependence on foreign capital in the way large-scale manufacturing does. Manufacturing forces countries to integrate deeply into global supply chains, earn foreign exchange at scale, and narrow their trade gaps sustainably. In FY25, even after accounting for services, India still ran a total trade deficit of $94.7 billion.

That’s why the Survey keeps pointing to East Asian economies, starting with Japan. Their experience shows how manufacturing-led exports can stabilise currencies, lower borrowing costs, and impose discipline across the economy. It also explains the Survey’s discomfort with protectionism. Shielding domestic firms behind tariffs may feel safe in the short term, but it raises costs, weakens export competitiveness, and keeps inefficient or ‘zombie firms’ alive.

This thinking is already shaping India’s trade strategy, including deals like the India–EU FTA. By lowering barriers in sectors such as automobiles, food products, and alcoholic beverages, India is choosing competition over protection.

The underlying belief is simple: real strength comes from scale, efficiency, and global competitiveness, not from building tariff walls that make the economy more fragile over time.

So yeah, that’s most of what stood out to us from the latest Economic Survey. There’s plenty more in there, of course, but you can only pack so much into a single explainer. And this one’s already a long read. But at least, what we’ve highlighted should be more than enough to keep you going until Budget day.

Until then…

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