The near-term economic outlook is neither gloomy nor euphoric(Express illustrations | Sourav Roy)
Updated on: 20 Jul 2026, 6:31 pm
The Indian economy is sending out two very different signals. One comes from the launchpad and the international Olympiads. Skyroot Aerospace has successfully completed India’s first private-sector orbital launch. And Indian students have performed spectacularly at the international Olympiads in mathematics, physics, chemistry and biology, with every participant returning with a medal. These are not merely feel-good stories. They reveal a deep reservoir of scientific talent, entrepreneurial ambition and institutional capability.
The other signal comes from the household budget. Prices are rising again, consumer confidence is weakening and many families are borrowing simply to maintain ordinary consumption. The economy is certainly not in crisis. But neither is it gliding effortlessly towards another year of exceptionally high growth.
The global backdrop has become less friendly. The IMF expects the world economy to grow by around 3 percent, while the World Bank and Moody’s Analytics put it closer to 2.5 percent. These numbers imply that global growth is slow, fragile and highly uneven.
The surge in artificial intelligence has lifted demand for semiconductors, data centres, advanced electronics and specialised machinery. Technology-heavy Asian economies plugged into these supply chains are benefiting. But many other countries and industries are falling behind. The phrase ‘K-shaped economy’ is now applicable to the world itself and the divergence is widening.
India will still grow much faster than the world. But it will not repeat last year’s 7.7 percent. Services, construction and some manufacturing sectors will provide important cushions. Early corporate results show healthy growth in profits. The banking sector is in excellent health. Bad loans are at historic lows, capital buffers are comfortable and corporate balance sheets are far healthier than a decade ago. Yet, this coexists with financially fragile borrowers.
Household debt has climbed to 48 percent of GDP. A growing share of loans is for consumption, rather than for housing, running a business or financing education. Lower-income households account for a disproportionate share of fresh retail defaults. Gold loans have expanded rapidly, sometimes because families are using higher gold prices to borrow more and roll over earlier debt. Financial stress is shifting to the household balance sheet.
This helps explain the RBI’s recent consumer confidence surveys. Urban confidence declined for the third successive round. Consumers remained pessimistic about the present, and even expectations for the year ahead weakened. This is reflecting anxiety about jobs, incomes, debt and the cost of living.
Retail inflation is inching closer to 5 percent. Wholesale inflation was ominously close to 10 percent, while fuel and power inflation component was above 27 percent. Fuel and power costs are inflation waiting in the pipeline. Costlier energy affects fertilisers, chemicals, plastics, packaging, refrigeration and animal feed. The effects eventually travel from the factory gate and the farm to the neighbourhood shop.
The pass-through is neither immediate nor complete. Companies may initially absorb higher costs through lower profit margins. The government may cut taxes or use subsidies. Weak demand may prevent firms from raising prices. Oil prices may fall before the entire shock is transmitted.
Food inflation is manifest in higher prices of maize, soybean meal and other feed ingredients that affect poultry and livestock. This pushes up the cost of eggs, chicken and eventually milk. Shortages of fodder and water can further hurt dairy and animal husbandry, which are important
El Niño may not be as devastating as it once was. Irrigation coverage has improved, reservoirs provide some protection, and better seeds and crop diversification have reduced agriculture’s dependence on rainfall. But the timing, geographical distribution and intensity of rain remain crucial. A normal national average can conceal severe deficiencies in particular districts. Pulses, oilseeds, coarse cereals, fodder and horticulture remain vulnerable.
Oil is the other swing factor. India imports almost nine-tenths of its crude requirement. Even if the Strait of Hormuz remains partly open, repeated price spikes worsen the trade deficit, weaken the rupee and raise transport and production costs. They also create an impossible dilemma for monetary policy: slower growth argues for lower interest rates, while higher inflation argues for restraint.
India’s external financing position also needs attention. The RBI-supported foreign currency non-resident deposit scheme was expected to attract a large volume of dollars, but the response so far appears less spectacular than initially hoped. Such deposits can provide temporary relief, but they are liabilities that eventually mature. They cannot substitute for durable foreign direct investment, stronger exports and competitive domestic manufacturing. Net foreign direct investment remains tepid despite healthy gross inflows, because repatriation and outward investment have also risen.
What, then, is the way out?
First, inflation must be tackled through supply management before it becomes entrenched. Timely imports of pulses, edible oils and animal-feed ingredients, release of food stocks, better logistics and calibrated fuel-tax reductions can be more effective than relying solely on interest rates.
Second, growth must become more income-led. Credit can temporarily bridge the gap between income and expenditure. But it cannot permanently replace income. Faster job creation, real-wage growth, lower household expenditure on health and education, and stronger protection against sudden income shocks would do more for consumption than another round of unsecured lending.
Third, governments must protect capital expenditure. Welfare transfers can cushion hardship and support demand, especially when targeted well. But the steady expansion of cash transfers, subsidies, waivers and politically-attractive promises is shrinking fiscal room.
Maharashtra’s recent decision to waive around ₹48,000 crore of overdue farm electricity bills illustrates the dilemma. Relief may be justified during genuine distress. But recurring waivers weaken payment discipline and divert rerastructure—the investments that can permanently raise rural incomes. There won’t be enough fiscal room, both for the Centre or the states
Finally, India must convert its scientific successes into an economic strategy. Olympiad medals and Skyroot’s launch show what focused institutions, autonomy and patient investment can achieve. With more focus on semiconductors, advanced materials, biotechnology, clean energy and defence manufacturing, India too can join the upward-moving arm of the world’s K-shaped economy rather than remain merely a large consumer market.
The near-term outlook is neither gloomy nor euphoric. India has strong banks, capable firms, adequate foreign-exchange reserves and extraordinary human talent. But consumers are cautious, household balance sheets are stretched, inflation is rising and fiscal choices are becoming harder.
The main task is to move from government-led investment and debt-supported consumption towards private investment and income-supported consumption. It’s not just about showing resilience to macro shocks, but also about creating durable prosperity.
Ajit Ranade | Economist and Senior Fellow at the Pune International Centre
