As 2026 approaches, India's economic narrative is being quietly rewritten by three significant, yet under-discussed, transformations. According to an analysis by Pranjul Bhandari, chief India and ASEAN economist at HSBC, these shifts hold the potential to shape a more durable and broad-based growth trajectory for the nation, provided they are sustained.
Shift 1: India Bucks the Global Trend Towards Protectionism
In a world increasingly leaning towards protectionism and inward-looking policies, India is charting a contrasting course by opening up its economy. Over the past year, the country has been strategically reducing import tariffs on intermediate goods, actively pursuing faster trade agreements with various nations, and showing greater receptiveness to foreign direct investment (FDI) across multiple sectors.
This move towards greater openness arrives at a pivotal moment, as the very nature of global trade is evolving in India's favor. While goods trade faces headwinds from tariffs and geopolitics, services trade is expanding rapidly, powered by technology and remote delivery models. India has successfully climbed the services value chain, progressing from IT service exports to providing software solutions and now emerging as a leader in global professional services.
Global Capability Centres (GCCs) in India are exporting a vast array of services worldwide, including design, accounting, legal, engineering, and HR. Furthermore, the distinction between goods and services is blurring with the rise of 'hybrid' products. Modern manufactured goods, from smartwatches and medical devices to cars, contain a significant embedded services component—an area where India's software and services prowess offers a substantial advantage to integrate deeper into global value chains.
Shift 2: Early Signs of Catch-Up Growth in Lower-Income States
A second crucial shift is the emerging pattern of 'growth convergence,' where India's lower GDP per capita states are beginning to show signs of catching up with their richer counterparts. Analysis indicates that Indian states have transitioned from a phase of growth divergence before the pandemic to showing early signals of convergence after it.
The primary driver behind this positive change is public capital expenditure (capex) by state governments. States like Assam, Uttar Pradesh, Rajasthan, and Bihar have stood out for their robust public capex and corresponding growth. Post-pandemic tax buoyancy provided the fiscal room for these investments.
However, this promising trend faces two immediate challenges: a slowdown in tax revenue growth and the announcement of new cash-transfer programs by several states, especially those heading into elections. While state capex has not been eroded yet, a further weakening of revenues could change that. To safeguard this convergence, the central government could enhance its capex-loans-to-states program, making it larger, more flexible, and predictable. Concurrently, states must operationalize central deregulation efforts, particularly in labor laws, to attract FDI into labor-intensive sectors like textiles and toys, leveraging their wage advantage.
Shift 3: Navigating Towards a 'Goldilocks' Macroeconomic Scenario
The third shift involves India's delicate balancing act to maintain a 'Goldilocks' economy—characterized by recovering growth and low inflation—into 2026. The related challenge is to address underlying imbalances, such as the modest contribution from private-sector capex and insufficient capital inflows to fund the trade deficit.
While reforms are the long-term answer to galvanize private investment, the immediate focus is on achieving a more balanced fiscal and monetary policy mix. On the fiscal front, the aim should be gradual and disciplined consolidation over several years to reduce public debt towards pre-pandemic levels, while safeguarding high-quality capital expenditure.
On the monetary side, policy must balance the needs of both savers and investors. For the inflation-targeting Reserve Bank of India, this means setting interest rates consistent with achieving the 4% inflation target. Encouragingly, drivers of the current disinflation, such as lower imported inflation from China, appear persistent, with inflation potentially dipping slightly below 4% in 2026-27. This could provide the central bank with room to ease rates if growth slows, facilitating a smoother transition towards a better-balanced economy.
The Path Forward for Durable Growth
The convergence of these three shifts—increased global openness, empowered state-level investment, and prudent macro-policy balance—presents a unique opportunity for India. If the nation can hold on to these gains, it can transform today's early advantages into a foundation for sustained, inclusive, and durable economic growth in the years leading up to 2026 and beyond.
