India's Economic Survey Warns of Geopolitical Risks and Capital Flow Disruptions
The Economic Survey for 2025-26, tabled in Parliament, has issued a stark warning about the negative effects of ongoing global political and economic turmoil on India. According to the Survey, these impacts may manifest with a lag, posing significant risks such as contraction in liquidity, disruption of capital flows, and a consequent adverse effect on the Indian rupee. As a nation heavily dependent on global capital flows, India must proactively plan for liquidity and external capital buffers in the coming year to mitigate these challenges.
Rupee's Valuation and Investor Reluctance
The Survey notes that India is a victim of geopolitics, with the rupee's valuation not accurately reflecting the country's stellar economic fundamentals. This discrepancy causes investors to pause, despite the potential benefits of an undervalued rupee, such as offsetting higher American tariffs on Indian goods and avoiding inflation from crude oil imports. However, investor reluctance to commit to India warrants careful examination, as it hampers capital inflows essential for growth.
Global Scenarios and Common Risks
Detailing three possible global crisis scenarios for 2026, the Survey outlines: business as in 2025, a disorderly multipolar breakdown, and a systemic shock cascade where financial, technological, and geopolitical stresses amplify each other. In all scenarios, the common risks for India include disruption of capital flows and the consequent impact on the rupee, with only the degree and duration varying. The Survey assigns probabilities of 40%-45% to the first two scenarios and 10%-20% to the third, warning that the latter could lead to a sharper contraction in liquidity and capital flow weakening.
FDI Flows and Incentives Required
Citing political stability and strong macroeconomic fundamentals as key drivers, the Survey emphasizes that India excels in attracting foreign direct investment (FDI) but could better leverage its strengths. Despite clear government intent and proven economic management, FDI inflows remain below potential, especially for infrastructure needs. The Survey lists examples from countries like Vietnam, Thailand, and Australia, highlighting tax holidays, customs exemptions, and other incentives that India could adopt to enhance its appeal.
To boost FDI, India needs a targeted strategy that identifies specific global value chain anchors and establishes a state apparatus collaborating directly with them as partners. This direct engagement can help resolve cross-agency issues and provide customised, time-bound solutions. Additionally, ensuring reliable implementation of incentives is crucial. Creating a task force to engage top global companies and promote India's advantages—such as stability, macroeconomic strength, sustained growth, and market size—could significantly boost FDI in targeted sectors.
Proactive Reforms and Diplomacy
Proactive reforms are essential to attract more foreign investment, the Survey asserts. India must generate sufficient investor interest and export earnings in foreign currency to cover its rising import bill, as rising imports will invariably accompany rising incomes regardless of indigenisation efforts. Efforts to improve the investment environment by simplifying processes and procedures must be sustained. Proactive diplomacy can also help offset tariff challenges, enhancing India's position in a volatile global landscape.
Current FDI Trends and Competition
The Survey's remarks come amid challenges to sustain FDI inflows in an environment of heightened global volatility. Recent data shows net FDI outflows for three consecutive months, with $446 million in November, following $1.67 billion in October and $1.66 billion in September. However, the rising trend of repatriation suggests that India is not only attracting foreign capital but also delivering strong returns, enhancing its reputation as a reliable investment destination.
For emerging market economies like India, the global shift entails greater competition for capital, slower expansion of global trade volumes, and heightened sensitivity of external flows to policy and geopolitical developments. India's economic policy must focus on stability of supply, creation of resource buffers, and diversification of routes and payment systems to navigate this complex environment.
Strategic Sobriety for 2026
The Survey concludes that 2026 may mark a point where policy credibility, predictability, and administrative discipline become strategic assets with lasting relevance. Therefore, the appropriate stance for 2026 is one of strategic sobriety rather than defensive pessimism. By adopting this approach, India can better manage risks from geopolitical alignments, industrial policy shifts, and strategic considerations that are reshaping the global economic landscape.
