This is not a prediction piece. The aim is to discuss the top five issues that are likely to dominate economic discourse this year.
Trading ties: India and the European Union (EU) are expected to finalise the free trade agreement (FTA) next week. Even if certain sensitive sectors are left out of the FTA, it will be a big breakthrough for both sides. However, there is still no clarity on the trade deal with the United States (US), which has imposed prohibitive tariffs on India, partly for importing Russian oil. The US is India’s largest trading partner, and a delay in the agreement will hurt the Indian economy. Besides goods trade, the deal also has a bearing on foreign direct and portfolio investments. Foreign selling in the stock market, for instance, over the past several months has put significant pressure on the rupee. Further, it would be worth watching whether India can substantially reduce overall tariffs, which, economists argue, is necessary to boost exports sustainably. Since India is open to signing big FTAs, including with the EU, dropping tariffs in general should now be relatively easy.
Fiscal focus: Starting next financial year, the Union government will shift to targeting the debt-to-gross domestic product (GDP) ratio. Presumably, the shift from targeting fiscal deficit to debt will provide more flexibility in managing government finances. India’s general government debt, at over 80 per cent of GDP, is high, and bringing it down to a more manageable level will require significant adjustments and a much smaller fiscal deficit. It is worth noting that financial markets would need to adjust to the possibility that the fiscal deficit may not decline to, say, 3 per cent of GDP over the medium term as many had expected. In other words, the supply of government bonds, which has been a concern in the market, may not decline significantly. The shift will need to be communicated carefully. It is also not clear at this stage whether states will be given similar flexibility in fiscal management. Debt stock in some states is at worrying levels and needs deeper policy attention.
Improving indicators: In the coming weeks, the statistics department will release new series for GDP, the consumer price index (CPI), and the index of industrial production. The weighting of food in CPI is expected to decline considerably, which should make it more stable and predictable. The new CPI will be of particular interest for monetary policy. The new GDP series is expected to address several weaknesses in India’s national accounts that economists have highlighted over the years. A new series with broader coverage and improved methodology will present a better picture of the economy and benefit all stakeholders, including India’s policy managers. However, the new series will be released after the presentation of the Union Budget on February 1, and may require revisiting Budget assumptions if the size of the economy is adjusted based on new numbers. Thus, the revision could have been better planned to avoid such a situation.
Fed under fire: There is considerable concern in global financial markets, and among other stakeholders, about the independence of the US central bank. In an unprecedented development, Fed Chair Jerome Powell has been threatened with criminal charges. Mr Powell termed it a consequence of not following President Donald Trump’s preferences. While the administration’s action has been condemned by many, including former Fed chairpersons and Republican members of the Senate Banking Committee, it is an open question as to how long the Fed will be able to hold its ground. Mr Powell’s term ends in May, and someone willing to toe Mr Trump’s line will likely be appointed. The Fed is the most powerful and consequential central bank in the world. If its ability to act independently is seen to be compromised, financial markets could slip into volatility of a kind that may be difficult to even describe. The US has the largest and most liquid financial markets, and the dollar is the world’s most important currency. As things stand, 2026 could be a defining year for the Fed and for the history of modern central banking.
Boom or bust: 2026 could also prove to be an important year for artificial intelligence (AI). Billions of dollars are being spent on building AI capabilities. According to one estimate, annual investment in AI applications is expected to top $1.5 trillion by 2030. However, the revenue flow from AI investment thus far has been underwhelming. Reportedly, some of the investments are being financed by borrowed funds through complicated instruments. However, if investor enthusiasm wanes and valuations begin to correct, it could have a potentially destabilising effect on global financial markets and the economy. According to one estimate, AI-related investments contributed more than consumer spending to US GDP growth in the first half of 2025. Some commentators believe there is a massive bubble in AI, and that its bursting could lead to a bigger crisis than the global financial crisis of 2008. Although nothing can be said for sure, interest in this area will increase in the coming months.
 "Five questions that will dominate debate in India and the world in 2026")
