India in 2026: Here are three big shifts that are quietly underway but few are talking about them

Over the last year, it has been cutting import tariffs on intermediate inputs, trying to fast-track trade deals with various countries and becoming more open to foreign direct investment (FDI) across sectors.

These steps can have sizeable benefits because the nature of trade itself is changing—in a way that can work to India’s advantage, particularly if it continues to signal openness.

Even as goods trade falls under the shadow of tariffs and geopolitics, services trade is rising faster, supported by technology and remote delivery models.

India is moving up the services value chain—from information technology service exports a few decades ago to becoming a software solutions provider and now a leader in professional services.

From its ever-rising global capability centres, India sells a wide range of services around the world, from design and accounting to legal, engineering and HR services. But this is not where it ends.

The line between goods and services trade is also blurring with the rise of ‘hybrid’ products. Many manufactured goods now have a large embedded services component.

A smartwatch is not simply a time-keeping device: much of its value lies in the software ecosystem that tracks health metrics and syncs with cloud platforms. Medical devices come bundled with diagnostic software and remote monitoring. Cars are increasingly described as “software on wheels.”

Given India’s strengths in services and software, this era of hybrid products—where the services component is rising rapidly—is a significant opportunity for the country to move further up global value chains.

Two, India’s lower income states are showing the first signs of catching up: Lower GDP per capita states can generate strong catch-up growth for several years if the conditions are right. In economics, this is known as ‘growth convergence’ and can be an important driver of national growth.

Evidence around convergence in India has been mixed. However, we find early signs that lower- income states are starting to rise, in some cases growing faster than higher-income states.

Our analysis suggests that Indian states have moved from a period of growth divergence before the pandemic to early signs of convergence after it.

One variable best explains this pattern—public capital expenditure by states. The states that stand out for strong public capex and growth include Assam, Uttar Pradesh, Rajasthan and Bihar.

When states are comfortable on the fiscal revenue front, they tend to raise capex, especially in the case of emerging states. After the pandemic, tax buoyancy increased, helping the cause.

Two problems are arising now. Tax revenue growth is slowing and several states, especially those going into elections, are announcing new cash-transfer programmes.

So far, this has not eroded state capex, but if revenues weaken further, that could change. Both the central government and the states have a role in preventing this.

The Centre could increase the scope of its capex-loans-to-states programme. These funds are strictly for capex and tend to crowd in states’ own resources. There is room to increase the size, broaden the eligible uses, make the scheme more flexible and increase its predictability.

For their part, Indian states should seize the growth opportunities coming their way. The Centre is leading a state deregulation drive and has eased key norms in labour laws, which had become a deterrent to growth. States can operationalize these changes on the ground and simplify procedures.

As global supply chains are being reconfigured, opportunities have emerged to attract FDI into labour-intensive sectors such as textiles, furniture and toys. India’s emerging states enjoy a wage advantage.

If this is combined with better infrastructure, further deregulation and easier labour laws, these states can rise quickly for long.

Three, India has a Goldilocks economy within reach: Having achieved something close to a Goldilocks scenario of recovering growth and low inflation, the challenge will be to maintain it in 2026.

A related challenge is to address underlying imbalances, such as too little a contribution from private-sector capex and insufficient capital inflows to fund the trade deficit.

Reforms are the ideal way to bring in the private sector over time, but in the short-run, the focus is on achieving a more balanced fiscal and monetary policy mix.

On the fiscal side, the aim should be to continue good-quality government spending without crowding out the private sector. This would entail gradual and disciplined fiscal consolidation over several years, in order to bring public debt levels closer to pre-pandemic norms while protecting capital expenditure.

On the monetary side, policy must work for both savers and investors. For an inflation-targeting central bank, that means setting interest rates and liquidity conditions consistent with achieving the 4% inflation target over time.

Here, there is some good news: several drivers of India’s current phase of disinflation, such as exported disinflation from China, look persistent, and inflation could come in a shade below 4% in 2026-27.

This would give the central bank some room to ease rates if growth were to slow, making the transition towards a better balanced growth mix easier.

If India can hold on to these shifts—greater openness, stronger state-level investment and a more balanced macro policy—it could turn today’s early gains into more durable, broad-based economic growth.

The author is chief India economist and Asean economist at HSBC.