As 2026 dawns, analysts and forecasters et al trade their spreadsheets for crystal balls and pretend that the next twelve months are likely to play out like a scripted blockbuster rather than a chaotic show.
As the past has shown, in a world of black swans and ‘caps-lock volatility’, forecasting has become the economic equivalent of trying to pin a tail on a moving monkey while blindfolded. That is why this article swaps the Crystal Ball for a Watchlist.
So here are six things to keep an eye on in 2026:
The Shadow of Washington: First up, will the policy chaos emanating from the US shores endure through 2026? US policies on trade, immigration and economics proved to be the biggest causes of volatility in 2025. There remain a few imponderables that will need careful monitoring for example can the U.S. tariffs —facing judicial scrutiny currently —get disrupted by the US Supreme Court? The other question mark as Fed Chair Powell's exit looms large is - will there be a "hostile takeover" of the Fed, forcing dovish cuts to juice fiscal splurges? The consequences of such an action could have major global spillovers in a debt laden world.
Trade: Turning "Pie-in-the-Sky" into Policy: Will India finally clinch meaningful trade deals with the U.S. and the EU, or will the uncertainty linger for longer? Talks for a bilateral trade agreement with Washington officially remain "advanced," and markets have been hopeful of not only a rollback of the 25% penal Russian-oil linked tariffs but also of a further lowering to 15-19% levels on Indian goods—that could potentially unlock $30-50 billion in annual exports and many times more via capital flows as it triggers positive sentiments. The other much hoped for $120 billion EU free-trade pact, has now spilled into January's ministerial meet, with some progress on startups and quirky wins like Prada-Kolhapuri shoe links. However, several other deeper issues including CBAM fester and need to be resolved with alacrity.
The Fiscal Pivot: A New Anchor: On the Fiscal consolidation front, for the first time in several years there are some anxiety-laden question marks. The government is on its way to more than halve the fiscal deficit from a high of 9.2% of GDP in FY21 to 4.4% in FY26, weeded out off-budget borrowings, boosting transparency and significantly improving the quality of expenditure with capital expenditure trebling in four years to 3.2% of GDP. However, the FY25 Budget had noted that from FY27 onwards the fiscal deficit would be kept such that the debt is on a declining path to attain the level of 50±1 per cent of GDP by March 2031. This shift will need more clarity and better communication since debt will be the fiscal anchor as against fiscal deficit, which was relatively better understood as the annual operating target. The idea of keeping debt on a declining path may not be as easy to understand or communicate and that may have implications for interest rates and the pricing of government securities. Also, certain executive (8th Pay Commission) and statutory actions (16th Finance Commission) along with gyrations in the aggregate state financial situation will likely weigh upon the overall fiscal trajectory.
Polishing the Statistical Mirror: Come February and the CSO will shift the GDP base year from 2011-12 to 2022-23 and for CPI the base will shift to 2024. The new IIP series, will also align with the new GDP base. This will better capture economic shifts leading to more accurate inflation and growth figures. However, these statistical changes could alter some of the things in the way Indian economy appears or is interpreted. For example, the size of the nominal GDP may rise leading to some of the ratios expressed in relation to the GDP ie fiscal deficit, Debt or Current Account deficit etc therefore appearing a tad smaller. The structure of the economy may also seem a bit altered ie the shares of sectors such as Agriculture, Industry or Services may undergo a change. Even the size of the informal economy may experience a variation with definitional changes and data capture methodology. Similarly, the share of food may go down in the CPI whereas share of non-food segments may rise and hence may lead to changes in the overall numbers. The rejig of macro numbers will lead to better quality data, clearer insights and better-informed policy decisions. Yet, these changes will warrant careful monitoring and interpretation of the structure and speed of the economy in 2026.
The Inflation Wildcard: A collapse in food inflation and benign core inflation along with well-behaved crude oil prices despite geo-political tensions and wars have been one of the biggest surprises of 2025. However, as has been seen time and again any complacency on inflation could prove to be a costly mistake. There remain multiple cyclical and structural forces that could propel inflation higher, putting a spoke in the wheels.
Sustaining the "Goldilocks" Moment: Lastly, the endurance of the ‘Goldilocks’ scenario will depend on what else is up the reforms sleeve. The government unveiled a flurry of reforms in 2025 with notification of the Labour codes, income tax rate moderation followed by GST rate cuts and rationalization, 100% FDI in Insurance and overhaul of MNREGA. Will the government go the distance with a big bang privatization, deregulation exercise and customs overhaul to complement its big moves on FTAs in 2026 to make the FIIs do an about turn on their ‘quit India equities’ movement? |
