As India’s Finance Minister, Nirmala Sitharaman, gets ready to present the annual budget this Sunday, the country’s economy, on the face of it, appears to be doing well.
India is on track to end the financial year with growth of 7.3%, cross $4tn (£2.97tn) in gross domestic product (GDP) and overtake Japan as Asia’s second-largest economy.
Retail inflation is below 2% and expected to remain under the central bank’s target in the coming months. Agriculture output, which supports about half the population, has been strong, cereal production is robust and government granaries are well stocked — boosting rural incomes.
Last year’s income tax cuts and the rationalisation of the goods and services tax (GST) — a levy on consumption — have also lifted consumer demand and stimulated spending. India’s central bank, Reserve Bank of India (RBI), has described this combination of high growth and low inflation as a «Goldilocks» phase — a term coined by US economist David Shulman to describe an economy expanding at just the right pace, with good jobs growth.
But the strong headline numbers conceal some of the deeper challenges.
The government says unemployment is falling, yet demand for unstable gig work remains high. India’s five largest IT companies — which for decades created tens of thousands of jobs every quarter — added a net total of just 17 employees in the first nine months of 2025. These are tell-tale signs of labour market weakness.
The hiring freeze in the software sector, which birthed India’s middle class from the 1990s, highlights the growing disruption caused by AI in the country’s vast back-office economy.
India's Prime Minister Narendra Modi (centre) embraces European Council President Antonio Costa (right) as European Commission President Ursula von der Leyen (left) looks on during the joint press statements after their meeting at the Hyderabad House in New Delhi on 27 January 2026.
India and the EU inked a free trade deal after 20 years of negotiations this week [AFP via Getty Images]
The slowdown in white-collar hiring accompanies the continuing crisis at India’s labour-intensive exports units.
India has entered 2026 with the looming shadow of Trump’s 50% tariffs – a deadlock that’s lasted far longer than expected. While Prime Minister Narendra Modi’s government has displayed great expediency for trade diversification by inking a string of free trade deals or FTAs — most recently with the European Union this week – the drag on exports has begun to show.
«Exports to the US weakened sequentially since the implementation of the 50% US tariff, while to the rest of the world it has picked up only marginally,» according to HSBC Research.
FTAs will help in the longer run, but whether India can compete with countries like Vietnam and Bangladesh in selling to non-US geographies would depend on many other things like quality, price and scale, say analysts.