The formulation of the 2026–27 Union Budget comes at a moment of unusual contrast. Externally, global uncertainty has intensified due to geopolitical tensions and steep US tariff barriers. Domestically, however, the first advance estimates for 2025–26 have delivered a pleasant surprise — GDP growth is now projected at 7.4 per cent, well above the earlier 6.5 per cent forecast by the Reserve Bank of India. This divergence makes the upcoming Budget a critical test of whether recent reforms can be deepened to sustain high growth in a more hostile global environment.
What the advance estimates signal
The revised growth outlook reflects more than cyclical recovery. It points to the tangible impact of structural reforms undertaken over the past few years. Growth in the first half of 2025–26 was particularly strong, with the first two quarters recording 7.8 per cent and 8.2 per cent respectively. Although growth is expected to moderate to around 6.9 per cent in the second half, the overall trajectory suggests improved resilience.
Equally significant is the rebound in manufacturing growth, which rose from 4.5 per cent to 7.4 per cent, providing a decisive push to overall GDP expansion. Over the last three years, average growth has hovered close to 8 per cent, reinforcing the sense that India may be entering a higher growth orbit.
GST restructuring as a growth catalyst
One of the most consequential contributors to this momentum has been the restructuring and recalibration of the Goods and Services Tax. By simplifying rate structures and reducing compliance complexity, GST reforms addressed a long-standing regulatory bottleneck.
The immediate payoff was visible in a surge in consumption during the October–November 2025 festival season, which in turn helped revive investor confidence. While the reform came later than it should have, its impact underscores how reducing “regulatory cholesterol” can unlock demand and investment simultaneously.
Labour codes and ease of doing business
Another long-pending reform finally implemented has been the four labour codes, which replaced 29 fragmented labour laws dating back, in some cases, to the colonial era. While not an instant growth stimulant, the codes have brought much-needed clarity to industrial relations and compliance.
They also modernise labour regulation by allowing greater flexibility such as work-from-home arrangements, while extending social security to workers in the rapidly expanding gig economy. Though gaps remain, the simplification itself is a strong signal to investors that India is serious about improving the business environment.
Why growth optimism still needs caution
The advance estimates also reveal areas of concern. The slowdown in the second half of the year indicates that momentum is uneven. Projections by institutions such as the World Bank place 2026–27 growth closer to 6.5 per cent, suggesting that sustaining 7-plus growth will require continued reform push rather than complacency.
This matters because India needs much faster growth to escape the middle-income trap and realise its ambition of becoming a developed economy by 2047.
Trade turbulence and export resilience
External headwinds are becoming more pronounced, particularly due to the trade policies of US President Donald Trump. Indian exports to the US face tariffs as high as 50 per cent, with additional uncertainty arising from potential penal tariffs linked to Iran-related trade.
The proposed India–US trade pact remains stalled, despite optimism generated by the new US Ambassador to India, Sergio Gor. In this context, the Budget will need to support export-oriented sectors likely to face stress.
Yet, recent data offers unexpected relief. In November 2025, exports in labour-intensive sectors such as gems and jewellery and readymade garments rose sharply. Overall exports increased by about 19 per cent, driven by electronics, engineering goods, pharmaceuticals, petroleum products and garments. Most strikingly, exports to the US rose by 22 per cent, with mobile phone shipments tripling within a year.
The jobs paradox behind strong growth
High GDP growth has not translated into adequate employment generation. Data from the Centre for Monitoring Indian Economy shows unemployment falling to an 8.6 per cent three-month low in December, largely due to reduced rural joblessness. However, this masks a deeper issue.
Agriculture still employs about 45 per cent of India’s workforce, while manufacturing has not expanded sufficiently to absorb either skilled or unskilled labour. India’s much-touted demographic dividend remains underutilised, especially among the youth.
Manufacturing, SMEs and lessons from Asia
The manufacturing sector holds the key to resolving this employment challenge. Other Asian economies have demonstrated how expanding small and medium enterprises can generate labour-intensive jobs at scale. The new labour codes can help by reducing hiring anxieties and compliance burdens, but complementary reforms are needed to boost SME growth and competitiveness.
What the Budget must prioritise
As Finance Minister Nirmala Sitharaman prepares the 2026–27 Budget, the central task will be to consolidate recent reform gains while accelerating change in other regulatory areas. Supporting export industries, deepening ease of doing business, and expanding manufacturing-led employment must take priority.
Only by speeding up reforms — as decisively as GST restructuring and labour code implementation — can India sustain high growth, create jobs at scale, and move closer to its long-term development goals.
What to note for Prelims?
- First advance estimates and GDP growth trends
- Role of GST reforms in economic growth
- Key features of the four labour codes
- India’s export composition and recent trends
What to note for Mains?
- Analyse the role of structural reforms in sustaining India’s growth momentum
- Discuss the challenges of job creation despite high GDP growth
- Evaluate the impact of global trade uncertainties on India’s Budget priorities
- Explain why manufacturing-led growth is critical for harnessing India’s demographic dividend
