Economic Survey 2025-26: External environment likely to remain volatile

For India, this could mean tougher competition for investment, slower growth in global trade volumes, and greater sensitivity of external flows to policy and geopolitical developments

The Economic Survey, presented on Thursday, cautioned that external environment is likely to remain “volatile” and “less supportive”, as trade, investment and capital flows are increasingly influenced by reordering of the global economic landscape shifting away from trade liberalisation.

 

For India, this could mean tougher competition for investment, slower growth in global trade volumes and more sensitivity of external flows to policy, and geopolitical developments.

 

The external sector includes international trade, investment, capital flows, and external debt, which shapes the country's economic performance and its integration with the global economy.

 

“The current global order faces three concurrent challenges: trade policy uncertainty driven by rising protectionism and retaliatory tariffs, strategic decoupling among major economies and the migration of national security tools into the domain of trade policy,” the survey said, pointing out the reorientation across critical sectors, such as semiconductor, critical minerals, telecom infrastructure and pharmaceutical inputs. 

 

The survey noted that external sector has remained strong, with deepening global integration, driven by robust exports, resilient services trade, and expanding trade networks. However, going ahead, the challenge for policymakers will be to use these strengths to keep the external sector stable, while maintaining high growth. This is because global trade and investment are increasingly influenced by strategic and geopolitical factors, rather than “purely economic considerations”.

 

“Over the medium to long term, this underscores the importance of policies that support manufacturing competitiveness, innovation, productivity and quality, alongside efforts to mobilise domestic savings,” the survey said.

 

The current environment also highlights the importance of achieving “strong export growth, making an export-oriented policy a pressing necessity”, it said. A robust and stable currency can only be achieved through export competitiveness. This requires a unified effort to reduce manufacturing cost to increase export competitiveness, it added.

 

Manufacturing cost can be reduced by correcting inverted duties, improving logistics infrastructure, lowering logistics costs, reducing regulatory expenses and some amount of import substitution.

 

India’s free trade agreements (FTAs) with more than half a dozen countries in the last five years support its trade strategy by offering reliable market access amid global uncertainty. These agreements enable export-focused firms to boost production and become more integrated into global value chains, while exposing local firms to international competition.

 

Despite tightening global financial conditions, India has attracted gross investment inflows, amounting to 18.5 per cent of gross domestic product (GDP) in FY25 and 16.9 per cent in (April-September) FY26. While gross foreign direct investment (FDI) in April-November rose to $64.7 billion from $55.8 billion a year ago, the survey pointed out that “proactive reforms” are essential to attract more foreign investment.

 

The survey flagged that despite a clear government intent and proven economic management, foreign direct investment (FDI) inflows remain below their potential, especially for infrastructure needs. Apart from robust Centre-State coordination, there’s a need for a strategic approach to identify priority sectors, along with a mix of incentives and reforms, to prevent the dilution of policy efforts.

 

“Additionally, it is crucial for India not only to offer compelling incentives but also to ensure these incentives are reliably implemented… Creating a task force to engage top global companies and promote India’s advantages could boost FDI, especially in targeted sectors. Proactive diplomacy, highlighting these strengths, can help offset tariff challenges,” it said. 

Navigating headwinds

• External sector remains strong with deepening global integration
• Driven by robust exports, resilient services trade, and expanding trade networks
• Challenge for policymakers will be to use these strengths to keep the sector stable, while maintaining high growth
• Global trade and investment are increasingly influenced by strategic, geopolitical factors