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The beginning of 2026 has brought encouraging signals for India, especially on the economic front. The government’s Economic Review released at the end of 2025 revealed that with a Gross Domestic Product (GDP) of $4.18 trillion, India has overtaken Japan ($4.17 trillion) to become the world’s fourth-largest economy. Projections suggest that within the next two-and-a-half to three years, India could surpass Germany to become the third-largest economy globally, with GDP expected to reach nearly $7.3 trillion by 2030. Prime Minister Narendra Modi, in a satirical remark, noted that the world is now “betting on New Delhi.”

Over the past decade, India’s economy has nearly doubled in size, placing it firmly on the path to becoming the world’s

third-largest economy. On January 7, 2026, the National Statistical Office (NSO), in its First Advance Estimates, projected robust real GDP growth of 7.4% for FY 2025–26, up from 6.5% in FY 2024–25, surpassing the Reserve Bank of India’s (RBI) estimate of 7.3%. The International Monetary Fund (IMF) has echoed similar optimism with a growth projection of 7.3%. Moreover, the RBI’s Monetary Policy Committee in December projected consumer price inflation to remain below 2%, comfortably under the 4% tolerance threshold, thereby safeguarding household purchasing power.

While these headline achievements have generated excite- ment about India’s rise towards “Vishwa Guru” status, deep-rooted structural challenges continue to undermine the prospects for truly sustainable and inclusive long-term growth. This article examines those challenges and the policy priorities they demand.

Structural Challenges and Policy Priorities

Although the projected growth rate of 7.4% is being celebrated as evidence of rapid economic acceleration, a closer look at quarterly data suggests that underlying momentum is moderating. Growth stood at a strong 7.8% in the first quarter (April–June 2025) and accelerated to 8.2% in the second quarter (July–September 2025). However, the full-year projection of 7.4% for FY 2025–26 implies that growth in the second half (October 2025–March 2026) is likely to ease to around 6.9%. This deceleration signals emerging weaknesses in domestic demand and heightened vulne- rability to global uncertainties.

Simultaneously, NSO data reveal that agriculture—employing nearly 45–47% of India’s workforce—continues to lag behind overall economic performance. Despite broadly favourable monsoon conditions, gross value added (GVA) in agriculture and allied activities is projected to grow by only 3.1% in FY 2025–26, down from 4.6% in the previous year and below the decadal average of 4–5%. Compounding this challenge, market prices for major crops such as cotton, wheat, pulses, and oilseeds have remained below their respective minimum support prices (MSPs). This prolonged price depression threatens farm incomes, curtails rural consumption, and widens the rural–urban economic divide. These trends also point to deeper demand-side weaknesses.

The GST 2.0 reforms, rolled out on September 22, 2025, aimed to simplify tax slabs, lower effective consumer prices during the festive season, and boost government revenues through higher consumption volumes. However, available data suggest that these objectives have not been fully realised. GST collections averaged around ₹2 lakh crore per month during April–September but declined to approximately ₹1.80 lakh crore per month between October and December. Consequently, despite repeated policy efforts, private sector capital expenditure has yet to revive meaningfully.

To stimulate consumption during the current financial year, the government introduced several measures, including income tax exemptions for incomes up to ₹12 lakh, GST rate reductions, and repo rate cuts by the RBI. Yet private investment has remained subdued. Although overall capital expenditure growth in FY 2025–26 exceeds that of the previous year, it continues to be driven primarily by public spending, with private sector participation conspicuously weak.

Together, these developments underscore persistent demand constraints and heightened uncertainty in the Indian economy. These conditions pose significant challenges for the forthcoming Union Budget. On the one hand, the government must sustain public expenditure to revive demand and support growth; on the other, it must restrain borrowing to meet fiscal deficit targets. Reconciling these competing imperatives will constitute one of the government’s most critical policy tests.

Fiscal Strategy Amid Competing Pressures

Although the formal budget preparation process begins in October–November, the Ministry of Finance continually reviews evolving economic conditions, incorporating the latest data up to the moment of presentation. Recent trends suggest that adhering to fiscal deficit targets for FY 2025–26 may become increasingly difficult. While the moderation in GST collections may still be manageable this year through tax measures or expenditure rationalisation, the more formidable challenge is likely to emerge next year, when the full impact of GST 2.0 exemptions and rate rationalisation is felt more sharply and persistently.

Broadly, the Finance Minister faces three principal options.

First, the government could increase the tax burden on the affluent, a strategy with international precedents. For instance, the United Kingdom’s 2025 Autumn Budget under Chancellor Rachel Reeves introduced measures such as freezing personal tax thresholds and modifying inheritance and capital gains taxes to raise revenues largely from higher-income and asset-owning groups, pushing the tax-to-GDP ratio toward historic highs. Similarly, France continues to levy a progressive wealth tax on real estate assets exceeding €1.3 million, with rates rising to 1.5% for holdings above €10 million. In India, enhancing taxes on wealth or high incomes could help reduce fiscal pressures, though economists caution that such measures, if poorly calibrated, risk capital flight.

Second, the government could reduce social expenditure, particularly on central sector and centrally sponsored schemes such as MGNREGA, housing programmes like PMAY, and education and health initiatives that support millions of poor and middle-class households. While such cuts could save thousands of crores and ease fiscal stress, in the context of agricultural slowdown, declining farm incomes, and persistent unemployment, austerity measures could exacerbate economic vulnerability, deepen rural distress, and fuel social discontent.

Third, the government could limit direct sovereign borrowing by channelising debt through public sector undertakings (PSUs) such as the Food Corporation of India (FCI) and the National Highways Authority of India (NHAI), while also extracting higher dividends from the RBI. While this approach offers short-term fiscal flexibility by keeping headline borrowing figures lower, past experience raises serious concerns about transparency, off-budget liabilities, and the long-term sustainability of public finances.

Each of these paths—revenue enhancement, expenditure restraint, or creative financing—entails significant economic, political, and social trade-offs. The choices made will decisively shape India’s fiscal trajectory at a time marked by subdued GST collections and persistent demand weakness.

From Numbers to People-Centric growth

There is no denying that India has emerged as a major global economy and is advancing at an impressive pace. Yet dazzling headline figures and high GDP growth rates alone cannot transform lives. The true test lies in whether policies and budgets strengthen mass consumption, support small and medium enterprises, revitalise agriculture, and expand social security. The future will reveal whether India has relied merely on shining data or built its strength on what truly matters—the welfare of its people, inclusive social participation, and sustainable capital formation.

The present moment demands that the government move beyond an obsession with macroeconomic aggregates and embrace people-centric development strategies. A genuinely inclusive budget could mark a decisive step in this direction by balancing investment, demand stimulation, and social welfare, ensuring that India’s economic future is not only larger in scale but also more resilient, equitable, and sustainable.

In sum, the real measure of India’s economic strength lies not in the impressiveness of headline numbers, but in the ability of governments to translate growth into meaningful, inclusive development that reaches every section of society and every village across the country.