Three Global Economic Scenarios for 2026: Risks and Opportunities from Economic Survey 2025-26
The Economic Survey 2025-26 presents a sophisticated analysis of the global economic outlook through the lens of scenario planning. Rather than offering a single point forecast, the survey outlines three distinct scenarios that could unfold in 2026, each with different probabilities and implications for India. This approach reflects the unprecedented uncertainty characterising the current global environment. For UPSC aspirants, understanding these scenarios is crucial for analyzing India's strategic options and policy responses.
Why Scenario Planning? The Nature of Current Global Uncertainty
The Economic Survey 2025-26 begins its analysis by acknowledging a fundamental truth about the current global situation: "although global growth and trade have held up better than expected, few are certain why this is the case." This uncertainty is not merely about specific parameters but about the very structure of the global economic system.
The survey identifies several structural features of the current environment: fragility, uncertainty, and episodic shocks. The balance of risks has "shifted perceptibly over the past year." Geopolitical competition has intensified, the security environment in Europe has become increasingly complex, and financial vulnerabilities associated with leveraged technology investments are looming. Trade policy is now "shaped primarily by security and political considerations rather than efficiency or multilateral rules."
Financial markets are already pricing this fragility. The survey notes that gold rose from USD 2,607 to USD 4,315 per ounce in 2025, reflecting a weakening US dollar, expectations of persistently negative real rates, and the market's growing assessment of geopolitical and financial tail risks. As of January 26, 2026, gold reached USD 5,101.34 per ounce, further confirming this trend.
Scenario 1: Business as Usual but Increasingly Fragile (40-45% Probability)
The first scenario outlined in the Economic Survey 2025-26 represents continuity with the current situation, but with an important caveat – the margin of safety is thinner than before.
In this scenario, the global economy continues on its current trajectory. Financial stress episodes, trade frictions, and geopolitical escalations occur but do not lead to systemic collapse. However, these events create volatility and require governments to intervene more actively to stabilise expectations.
The survey describes this scenario as "less about continuity and more about managed disorder, with countries operating in a world that remains integrated yet increasingly distrustful." The key characteristic is that minor shocks can escalate into larger reverberations because the system's shock absorbers have weakened.
The Global Economic Policy Uncertainty Index supports this assessment. The survey notes that this index is "near its worst readings of 2020, excluding the sharp spike in April 2025 at the introduction of the reciprocal tariffs." Despite economic data appearing relatively stable, fear and uncertainty persist beneath the surface.
For India, this scenario is manageable but requires vigilance. The economy can continue its growth trajectory, but policymakers must be prepared to respond quickly to emerging stress points. Building buffers in terms of foreign exchange reserves, fiscal space, and policy flexibility becomes important.
Scenario 2: Disorderly Multipolar Breakdown (40-45% Probability)
The second scenario represents a significant deterioration from the current situation. The Economic Survey 2025-26 assigns it the same probability as the first scenario, indicating that a move toward greater disorder is just as likely as maintaining the status quo.
In this scenario, strategic rivalry intensifies across multiple dimensions. The Russia-Ukraine conflict remains unresolved in a destabilising form. Collective security arrangements unravel as countries prioritise bilateral over multilateral approaches.
Trade becomes "increasingly explicitly coercive." Sanctions and counter-measures proliferate. Supply chains are realigned under political pressure rather than economic logic. Friend-shoring and nearshoring accelerate as countries seek to reduce dependence on perceived adversaries.
Financial stress events become more frequent and are "transmitted across borders with fewer buffers and weaker institutional shock absorbers." International coordination mechanisms that worked during previous crises (such as the 2008 financial crisis or the COVID-19 pandemic) may not function as effectively.
Policy becomes more nationalised, and countries face "sharper trade-offs between autonomy, growth, and stability." The survey's language suggests a world where international cooperation breaks down and each country must fend for itself to a greater extent.
For India, this scenario presents both challenges and opportunities. On one hand, trade disruptions and financial volatility would affect the economy. On the other hand, India's strategic autonomy, large domestic market, and growing manufacturing capabilities position it as a potential beneficiary of supply chain diversification. Countries and companies seeking to reduce China dependence may look to India as an alternative.
Scenario 3: Systemic Shock Cascade (10-20% Probability)
The third scenario, while assigned lower probability, carries the most severe consequences. The Economic Survey 2025-26 describes it as a situation where "financial, technological, and geopolitical stresses amplify one another rather than unfolding independently."
The survey specifically highlights the risks in the technology sector. On Christmas Eve 2025, the Financial Times reported that "tech companies have moved more than $120 billion of data centre spending off their balance sheets using special purpose vehicles funded by Wall Street investors, adding to concerns about the financial risks of their huge bet on artificial intelligence." The CEO of IBM openly questioned the economics of Large Language Model-based AI.
Given the leverage involved, a correction in AI-related investments "could have cascading effects across financial markets and the real economy." This echoes the pattern of past financial crises where excessive speculation in a single sector (dot-com stocks in 2000, housing in 2008) triggered broader economic downturns.
The survey also flags the sharp rise in yields of Japanese Government Bonds as another warning sign. Japan's ultralow interest rate policy has been a cornerstone of global financial arrangements, with the yen serving as a funding currency for carry trades worldwide. Disruption to this arrangement could trigger rapid unwinding of leveraged positions.
If such financial stress were to coincide with geopolitical escalation or trade disruption, the resulting interaction could produce "a sharper contraction in liquidity, a sudden weakening of capital flows, and a shift toward defensive economic responses across regions."
The survey warns that while this remains a lower-probability scenario, "its consequences would be significantly asymmetric. The macroeconomic consequences could be worse than those of the 2008 global financial crisis."
India's Position Across All Scenarios
The Economic Survey 2025-26 offers a comparative assessment of India's position across all three scenarios. "In all three scenarios, India is relatively better off than most other countries due to its strong macroeconomic fundamentals," the survey states.
India's advantages include:
Large Domestic Market: With 145 crore people, India's internal consumption provides a significant growth engine that is less dependent on external demand.
Less Financialised Growth Model: Unlike some advanced economies where financial speculation drives a large part of economic activity, India's growth is more grounded in real production and consumption.
Strong Foreign Exchange Reserves: India maintains adequate reserves to manage external shocks and currency pressures.
Strategic Autonomy: India's foreign policy independence means it is not locked into any single power bloc and can navigate between competing global powers.
However, the survey cautions that these advantages "provide buffers in an environment where financial volatility is imminent and geopolitical uncertainty is permanent" but do not guarantee insulation.
Common Risk: Disruption of Capital Flows
The Economic Survey 2025-26 identifies one risk that cuts across all three scenarios for India: "disruption of capital flows and the consequent impact on the rupee."
India runs a current account deficit, meaning it imports more goods and services than it exports. This deficit must be financed through foreign capital inflows – either as foreign direct investment, portfolio investment, or external borrowings. When these flows are disrupted, the rupee comes under pressure.
The survey notes: "Only the degree and the duration will vary. In a world of geopolitical turbulence, this may not be confined to a year but could be a more enduring feature."
In response, India needs to pursue two parallel objectives: generate sufficient investor interest to attract foreign capital, and increase export earnings to reduce the gap that needs to be financed. The survey emphasizes that "regardless of the success of indigenisation efforts, rising imports will invariably accompany rising incomes. This has been the historical global experience."
Policy Response: Running a Marathon and Sprint Simultaneously
The Economic Survey 2025-26 uses a striking metaphor to describe the policy stance required in this environment: "India must run a marathon and sprint simultaneously, or run a marathon as if it were a sprint."
This metaphor captures the dual challenge facing policymakers. The marathon represents the long-term structural transformation needed to achieve Viksit Bharat – building manufacturing capability, improving human capital, strengthening institutions, and reducing dependence on foreign capital. These are multi-year endeavours that cannot be rushed.
The sprint represents the need to respond quickly to immediate crises and shocks. In a world where "minor shocks can escalate into larger reverberations," delayed responses can prove costly.
The survey recommends that economic policy focus on:
- Stability of supply for critical inputs
- Creation of resource buffers
- Diversification of trade routes and payment systems
- Policy credibility, predictability, and administrative discipline
The appropriate stance for 2026 is "strategic sobriety rather than defensive pessimism." The external environment requires India to prioritise both domestic growth maximisation and shock absorption, with greater emphasis on buffers, redundancy, and liquidity.
The Entrepreneurial State Concept
Facing these global scenarios, the Economic Survey 2025-26 calls for India to develop what Mariana Mazzucato terms an "entrepreneurial state." This does not mean state capitalism or commercialisation of government. Rather, it refers to "a deeper shift towards entrepreneurial policymaking under uncertainty."
An entrepreneurial state can "act before certainty emerges, structures risk rather than avoids it, learns systematically from experimentation, and corrects course without paralysis." In a world where the three global scenarios suggest high uncertainty and potential for rapid change, this capability becomes essential.
UPSC Relevance: Global Economic Scenarios
For UPSC examinations, understanding global economic scenarios is important for:
- Essay papers that may ask about global uncertainties and India's response
- GS-II questions on international relations and global institutions
- GS-III questions on external sector, trade policy, and economic resilience
- Current affairs analysis requiring understanding of global dynamics
Practice MCQs on Global Economic Scenarios - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, what is the probability assigned to the "business as usual but fragile" scenario for 2026?
(a) 20-25%
(b) 30-35%
(c) 40-45%
(d) 50-55%
Answer: (c) 40-45%
Q2. The Economic Survey 2025-26 cites the rise in gold prices as an indicator of:
(a) Increased industrial demand
(b) Growing assessment of geopolitical and financial tail risks
(c) Decline in gold mining output
(d) Central bank gold selling
Answer: (b) Growing assessment of geopolitical and financial tail risks
Q3. In the third scenario presented in Economic Survey 2025-26, the macroeconomic consequences could be worse than:
(a) Asian Financial Crisis 1997
(b) Dot-com Bubble 2000
(c) Global Financial Crisis 2008
(d) COVID-19 Pandemic 2020
Answer: (c) Global Financial Crisis 2008
Q4. According to Economic Survey 2025-26, which common risk affects India across all three global scenarios?
(a) Food inflation
(b) Disruption of capital flows
(c) Technology obsolescence
(d) Labour shortages
Answer: (b) Disruption of capital flows and impact on rupee
Q5. The phrase "entrepreneurial state" used in Economic Survey 2025-26 refers to:
(a) Government running commercial enterprises
(b) State capitalism and industrial policy
(c) Policymaking that can act under uncertainty and learn from experimentation
(d) Privatisation of government functions
Answer: (c) Policymaking that can act under uncertainty and learn from experimentation
Conclusion
The three global economic scenarios presented in the Economic Survey 2025-26 provide a framework for understanding the uncertainties facing the world economy and India's strategic options. Whether the world experiences continued fragility (Scenario 1), multipolar breakdown (Scenario 2), or a systemic shock cascade (Scenario 3), India must prepare for each possibility while pursuing long-term structural transformation. The survey's emphasis on "strategic sobriety," buffer-building, and entrepreneurial policymaking offers a roadmap for navigating these uncertain times while continuing the journey toward Viksit Bharat.