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Every financial year (FY) brings a set of challenges for an economy, regardless of its current performance. Even when an economy is doing well, it must maintain momentum or strive for further improvement. In the case of India, FY 26 presents several structural challenges to sustaining GDP growth.

In FY 24, India achieved an impressive GDP growth rate of 8.2%—the highest in the last 12 years—compared to 7% in FY 23. However, in the recently concluded FY 25, the growth rate is expected to remain below 6.5%. Accelerating economic expansion is, therefore, a key challenge for Indian policymakers. Some observers aspire to achieve sustained double-digit growth, aiming for India to attain developed-country status by 2047. A developed country is typically defined by an annual per capita income of $14,500, whereas India’s current per capita income stands at approximately $2,400. This underscores the need for higher GDP growth to improve living standards.

Boosting the Manufacturing Sector

Another critical challenge is increasing the share of manufacturing in GDP. Currently, manufacturing contributes about 13%, down from over 15% a few years ago, despite the “Make in India” initiative launched more than a decade ago. Expanding the manufacturing sector is essential, primarily for employment generation. Micro, small, and medium enterprises (MSMEs), the second-largest employer after agriculture, have seen a decline in their employment share over the past five years. Reviving and strengthening this sector is a major challenge for the Indian economy.

Challenges in the Export Sector

India’s export sector also faces difficulties, particularly in goods exports, while service exports continue to perform well. Many economists argue that India holds a comparative advantage in service exports. In their book Breaking the Mould: Reimagining India’s Economic Future, Raghuram Rajan and Rohit Lamba highlight that direct service exports represent a new frontier for the Indian economy.

They also note that services are increasingly embedded in manufactured products, offering growth opportunities. Notably, around 20% of global chip design is now conducted in India, demonstrating the country’s potential in high-value sectors.

Managing the Current Account Deficit (CAD)

Maintaining the Current Account Deficit (CAD) at a sustainable level is another pressing concern. In Q2 of FY 25, the CAD moderated to 1.2% of GDP despite a rising goods trade deficit. CAD is influenced by global trade policies, import-export balances, currency depreciation, and overall trade conditions. The Indian rupee has been depreciating significantly, which poses additional challenges. Addressing these issues will require strategic interventions in FY 26.

Strengthening Macroeconomic Policies

Macroeconomic policies, including fiscal and monetary measures, play a crucial role in ensuring stable and sustained economic growth. The Indian government has implemented fiscal policies aimed at stabilizing the supply side of the economy, but these have not yielded the desired results. Demand-side policies must also be considered, particularly those that enhance purchasing power. Higher employment levels are essential for boosting demand, making job creation a priority. Investing in labor-intensive sectors such as agriculture, rural development, MSMEs, healthcare, education, and transportation could help address this challenge.

Role of Monetary Policy

The Reserve Bank of India (RBI) plays a crucial role in shaping monetary policy. Its responsibilities extend beyond setting policy rates such as repo and reverse repo rates. In recent years, the RBI has actively intervened in the foreign exchange market to stabilize the rupee. However, critics argue that these interventions have not yielded favorable results, leading to rising exchange rates. This trend could negatively impact exports, foreign loan repayments, and overseas education costs. In FY 26, the RBI may need to reassess its approach to exchange rate management.

Controlling Inflation and Price Stability

Lastly, maintaining price stability—especially in food prices—will be a significant challenge for policymakers. While inflation is a normal economic phenomenon, excessive price increases (beyond 2% to 4%) can severely impact lower-income groups. Rising food inflation acts as a heavy tax on the poor, making it imperative for the government to implement effective policies to keep food prices in check.

Conclusion

As India enters FY 26, policymakers must address these economic challenges with strategic planning and decisive action. Sustaining GDP growth, revitalizing manufacturing, enhancing exports, managing the current account deficit, implementing effective macroeconomic policies, reassessing monetary strategies, and controlling inflation are key priorities. Addressing these issues will be crucial in ensuring long-term economic stability and improving the livelihoods of millions of Indians.