Many of you will be surprised to read that the Indian economy which is growing strongly can actually be losing its way through this growth phase. Well, while on the face of it, it appears that India’s economy is powering ahead, even as it is being buffeted by adverse factors such as the punitively high US tariffs of 50% on Indian exports to the country, there are reasons to remain cautious in the months and years ahead.
The Indian economy grew at a rate of 8.2% in the September quarter of FY26, above the June quarter when we grew at 7.8% and well above the year-ago rate of 5.6%. What’s more, private consumption and gross fixed capital formation also grew healthily at 7.9% and 7.3% respectively, while a year ago, they grew at 6.4% and 6.7%. Sequentially, private consumption grew faster than investment, though it is still early days to tell the impact of the GST rationalisation announced by the government which began only on September 22, 2025. All sectors of the Indian economy grew at good rates, with industry growing 8.1% on the back of surprisingly good growth in manufacturing and construction. Services, as always grew at the fastest rate of 9.2%, with financial, real estate and professional services growing the most at 10.2%. It was always expected that on account of a base effect, the Indian economy would grow at a higher rate in the second fiscal quarter of FY26, and the areas that clearly show a large base effect impact are manufacturing, exports and imports.
So far, so good. Inflation too is low, both for CPI and WPI, though here I would caution that we have to watch the core CPI (excluding food and energy) which is still at high levels, hovering around 4%. CPI in November 2025 ticked up slightly over the previous month, at 0.71% over 0.25%, though it could equally be a base effect, since in November 2024, CPI was at 5.48%. We seem to be obsessed with food inflation for some reason (and I suspect this is unprofessional PR agency idiot bosses’ impact on economic statistics) and this has come down significantly to -3.91% from a high of 9.04% in November 2024. Food inflation is trending down faster than general consumer price inflation in India, which tells us that core inflation is still high. Housing, health and education inflation levels are still high even if lower than in October 2025, but the one that took my breath away was CPI in personal care and effects which was 24.04%! In fact, rural CPI in personal care and effects was 24.22%, would you believe it?! The other number that strikes me as highly suspect is November CPI in transport and communication of just 0.88%. In this entire document, the government doesn’t bother to mention the core CPI, the most important consideration for policy matters. From a quick calculation that I did, it appears to be around 3.5% for November 2025. Notwithstanding the fact that unprofessional PR agency idiot bosses have been meddling with economic data everywhere (not just in India) the fact that core inflation is high ought to be a matter of concern to all. Besides, food and fuel prices are known to be volatile and with wars still raging and the geopolitical situation being what it is, India cannot take low inflation for granted.
Which brings me to India’s external sector that continues to be vulnerable. With the weakening Indian rupee – that breached the Rs 90/- level to the US dollar, imports are going to become even more expensive. A weaker rupee helping Indian exports cannot and should not be a reason for allowing or encouraging it to fall further. Most of it is because of foreign investors pulling money out of India, and we have to therefore watch net foreign investment levels. While RBI is managing it alright, I don’t think selling any more dollars in the market to prop up the Indian rupee can continue for long. The RBI has once again cut interest rates by 0.25% in order to boost growth, though I didn’t think it was necessary; in fact, I don’t think any of the interest rate cuts by RBI in the recent months were necessary since economic growth in India hasn’t slowed to an extent that warrants this. The weakening rupee also makes our debt repayment a heavier burden, especially with ECBs (external commercial borrowings) also rising and with NBFCs borrowing in the international market.
Most of all, I think there is a possibility that more expensive imports could dampen private sector investment in India at a time when consumption demand is picking up momentum because of the GST rationalisation. And greater private investment is what the Indian economy needs in order to create more and better-quality jobs and grow in a more sustained manner in the coming quarters and years. I hope the Indian government hasn’t forgotten that its main task and challenge is to generate more and better employment for millions in the country. This is what will determine growing consumption demand in the future, in addition to the GST rationalisation.
If we look at the IIP (index of industrial production) in India, it has fallen again in October 2025 to a mere 0.4% growth year on year when in September 2025, it was 4.6%. This is a sharp slowdown sequentially as well as year on year when in October 2024 it was 3.7%. The IIP seems to indicate a serious slowdown in manufacturing, when only 9 out of 23 industry groups showed positive growth and this should be cause for concern in a country that is focused on growing its manufacturing sector. Usually, I have found the PMI numbers to be quite different from the IIP as they possibly track different kinds of companies, and the HSBC composite PMI for India for December 2025 according to The Economic Times is 58.9, lower than 59.7 recorded for November 2025, representing the slowest pace of growth in ten months. What’s more the slowdown seems to be in both manufacturing and services and is mainly on account of new orders as well as little to no job creation.
The IIP for November 2025, however, shows an incredible growth of 6.7%, led by manufacturing at 8% – would you believe it – and mining activity which grew after the lows of the monsoon period by 5.4%. All industries grew output, with even consumer non-durables growing by 7.3%, when for years they have been in contraction or negligible growth. As I have written before on my blog, IIP numbers tend to be highly unreliable in India, for the same unprofessional PR agency idiot bosses’ meddling with economic data in order to make me R Sarada – my former Ogilvy colleague whom I hired in the mid-1990s in Delhi, or my younger sister, Bhavani Sundaram, or my aged father, Mr MA Sundaram. If this is not enough, we have CMIE reporting that the 30-day moving average of India’s unemployment rate on January 2, 2026 to be 6.9%, when around the end of December 2025, it was 6.7%. Again, mischievous meddling by PR agency idiots with economic data to cover up their unprofessional nonsense.
We will soon see the first corporate earnings for 2026 and for the third quarter of FY26 being announced, and they might give us a good indication of how much consumer demand has grown thanks to lower GST rates. And we also have the Union Budget 2026 coming up, which is what I would like to focus on in the rest of this article. I think the focus of the Union Budget this year should once again be on fiscal consolidation and debt management. We will know the exact position on fiscal deficit, but I hope the government manages to keep it at 4.5% of GDP, which is what was committed. The government spending in 2025 could have been higher on account of higher fertilizer subsidy and oil marketing companies’ payouts for which a supplementary demand for grants had to be made according to media reports.
I think the government should discontinue the middle-class income tax breaks under the new regime, as it is quite unnecessary now that we have lower GST rates that can achieve the same objective of boosting consumption better than income tax breaks. In any case, they were meant only for FY26, I think. Besides, the idea of having income tax breaks, lower GST rates and lower interest rates all together seems like an overkill on “boosting growth”, when lower GST rates are good enough.
I think what needs greater attention is the need to boost private sector investment in job-creating businesses and in innovation. This requires special incentives for the MSME sector, especially those that are focused on new and promising high-growth industries such as information technology and AI, clean technology, renewables and the like. As I have been writing on my blog, the MSME sector is key to employment generation as well as formalizing the economy both of which should be chief objectives for the government in its quest to achieve developed nation status by 2047.
And as I have also written earlier, the MSME sector is critical to taking landless labourers and informal migrant labour out of agriculture and making skilled workers of them. Instead, the Indian government has tried to rebrand and tweak MGNREGA with a misplaced sense of priorities. MGNREGA was never an employment generator in a permanent sense, only a fall-back option for those who badly need work in rural India. Two decades later, it shouldn’t have been necessary in India had the country managed to impart skills and create good quality jobs in this time. I don’t see what purpose increasing the number of days of work to 125 serves, especially if states are being expected to shoulder 40% of the expenditure on the scheme. Instead, I think states should overhaul and revive their state employment exchanges to create better jobs for landless and migrant labour, and this is where the MSME sector can help. The government can subsidise the cost of training and skill development. There are many parts to the employment generation exercise and they all have to work together in order to deliver results. MGNREGA ought to have been left intact, and perhaps better auditing of its working could have helped plug the leaks if any.
Another sense of misplaced priorities is evident from the need to suddenly privatise nuclear energy in India. Nuclear energy was never such a large component of our energy generation mix and even years after discussion with foreign supplier countries such as US and France we are nowhere in terms of implementation. Why is nuclear energy such a high priority for India suddenly, when there are more important and fundamental issues that India needs to focus on. Instead of agonizing over nuclear energy, we should have shifted our power generation sector to cleaner energy such as natural gas, decades ago. And when it comes to job-generation nuclear energy is no match for the renewables industry and many others.
If we have to prioritise anything, it should be jobs and better jobs. It should also have been the indigenous manufacture of APIs (active pharmaceutical ingredients) for which we are totally dependent on Chinese imports. PLIs – even though I don’t agree with the idea of PLIs – for this sector should have been announced and India ought to be self-sufficient in pharmaceutical ingredients.
It is these kinds of misplaced priorities than can take our attention and thought away from the most critical areas and make us lose our way in our journey to higher and more equitable economic growth. Let us focus on promoting innovation in a country that has a considerable knowledge economy, instead. And let us conduct our census in time, so that lives of 1.4 billion Indians can be better understood. Unfortunately, our politicians think of 1.4 billion people only at the time of elections.
Peripatetic Perch 