Despite extraordinary geopolitical, financial, and technological uncertainty, the global economy defied pessimism in 2025. Growth held up, inflation cooled, and financial conditions eased sharply. Yet resilience should not be confused with strength. The central question as the world moves into 2026 is whether this momentum can be sustained — and what kind of growth lies ahead. For India, the moment offers opportunity, but also exposes deeper structural choices about technology, labour, and institutions.
Why global growth held up in 2025
Global performance last year surprised on the upside. The United States recorded solid GDP growth, though beneath the headline numbers, job creation slowed, suggesting diminishing post-pandemic momentum. China, meanwhile, registered record current account surpluses as global supply chains realigned and exports adapted swiftly to new trade patterns. This external strength, however, masked persistent domestic weaknesses — especially stress in real estate and subdued household consumption.
A major support came from easing inflation. As price pressures receded, nine of the ten central banks overseeing the world’s most traded currencies cut policy rates, making 2025 the most aggressive year of global monetary easing since the 2009 crisis. Yet high public debt and fragile fiscal positions continue to constrain governments, limiting their ability to respond to future shocks.
Markets, AI optimism, and valuation risks
Financial markets ran well ahead of underlying fundamentals. Equity rallies were driven by enthusiasm around artificial intelligence and a weakening US dollar, raising concerns of overvaluation. While AI’s immediate impact on jobs appears limited, its long-term transformative potential is undeniable.
Recent reminders from the Nobel Prize in Economics reinforced an important insight: innovation alone does not generate growth. It must be complemented by usable knowledge, skilled professionals, and societies willing to adapt to change. Without these, technological breakthroughs fail to translate into sustained prosperity.
India’s ‘Goldilocks’ moment
Against this global backdrop, India stands out as relatively well-positioned. The described the economy as being in a “Goldilocks” phase — neither overheating nor stagnating. By December 2025, the policy repo rate had been cut by a cumulative 125 basis points to 5.25 per cent, supported by liquidity measures and regulatory easing.
The financial sector strengthened further, with bank balance sheets improving and gross non-performing assets expected to fall to around 2.3–2.5 per cent by March 2026. Fiscal consolidation continued at the Centre, alongside the rollout of the first National Monetisation Pipeline. An upgrade by S&P Global Ratings acknowledged this macroeconomic discipline, signalling rising confidence in India’s policy framework.
Comfortable externals, unresolved domestic gaps
India’s external position remains manageable. Services exports have acted as a shock absorber, the rupee has become more market-determined, and the current account deficit remains contained. Yet vulnerabilities persist. Overall output is still estimated to be more than 3 per cent below its pre-pandemic trend, pointing to lingering demand weakness.
Public debt ratios remain elevated, partly due to competitive pre-election transfers. Foreign direct investment has not matched India’s potential, while portfolio flows remain volatile. Capacity utilisation is only modestly above long-term averages, indicating that firms remain cautious despite favourable financial conditions.
Investment, savings, and the missing capex cycle
A central concern is financing the next phase of growth. Household financial savings have softened as higher borrowing for housing and consumption offsets precautionary saving. Corporates, for their part, have focused on deleveraging rather than aggressive capacity expansion.
Although infrastructure investment has been robust — improving logistics efficiency and reducing cargo release times — a broad-based private capital expenditure cycle has yet to emerge. This underscores a critical lesson: interest rates and incentives alone are insufficient. Policy credibility, regulatory predictability, and confidence in future demand are equally decisive.
Creative destruction and its social costs
India’s challenge now is to embrace creative destruction while managing its consequences. Structural weaknesses in health, education, and urban development persist. Environmental stress is particularly acute: India ranks among the world’s most polluted countries, with significant economic and health costs, yet clean air has not become a decisive political issue.
Sectoral stresses — from aviation to urban infrastructure — raise deeper questions about market structure, competition, and the balance between public and private roles. Regional disparities remain stark, exemplified by Bihar, which houses nearly 9 per cent of India’s population but contributes less than 2 per cent of GDP, despite notable progress in services and high-value agriculture.
Technology, labour, and the Indian paradox
India’s demographic advantage creates both promise and tension. As a labour-abundant economy, basic economics would suggest prioritising labour-intensive production. Yet firms increasingly adopt capital-intensive technologies. The answer may lie not in competing at the technological frontier, but in adapting existing technologies — including AI — to Indian conditions across agriculture, logistics, health, and public services.
India’s research spending remains modest at around 0.65 per cent of GDP, and patent filings lag far behind China. History shows, however, that most growth miracles relied less on frontier innovation and more on scaling known technologies through skills, firm capabilities, and effective institutions.
What to note for Prelims?
- Global monetary easing trends post-2024.
- India’s repo rate trajectory and banking sector health.
- Concept of creative destruction.
- India’s external sector indicators.
What to note for Mains?
- Limits of innovation-led growth without institutional support.
- Role of policy credibility and regulatory predictability in private investment.
- Balancing technology adoption with labour-intensive growth.
- Managing social and environmental costs of economic transformation.
