TOPPER IAS — UPSC Prelims 2026
Economic Survey 2025-26 | Chapter 1 — State of the Economy: Pushing the Growth Frontier
PRELIMS
2026
READY
2026
READY
| Component | H1 FY25 | H1 FY26 | FY25 (PE) | FY26 (FAE) |
|---|---|---|---|---|
| Agriculture & Allied | 2.7% | 3.6% | 4.6% | 3.1% |
| Manufacturing | 4.8% | 8.4% | 4.5% | 7.0% |
| Industry | 6.1% | 7.0% | 5.9% | 6.2% |
| Services | 7.0% | 9.3% | 7.2% | 9.1% |
| GVA Total | 6.2% | 7.9% | 6.4% | 7.3% |
| PFCE (Consumption) | 7.3% | 7.5% | 7.2% | 7.0% |
| GFCF (Investment) | 6.7% | 7.6% | 7.1% | 7.8% |
| GDP | 6.1% | 8.0% | 6.5% | 7.4% |
| Economy | Growth 2025 (Jan'25) | Growth 2025 (Jan'26) | Inflation 2025 (trend) |
|---|---|---|---|
| Advanced Economies (AE) | 1.9% | 1.7% | Stubbornly +40 bps vs Jan'25 |
| EMDEs | 4.2% | 4.4% | Declined further |
| Global | 3.3% | 3.3% | — |
Deliberate use of economic means to achieve strategic/foreign policy/national security ends. Goes beyond normal economic policy (fiscal, monetary, trade) which targets purely economic objectives.
| Example | Who / When | Nature |
|---|---|---|
| Megarian Decree | Athens vs Megara, ~432 BCE (pre-Peloponnesian War) | Economic sanctions; barred Megarian merchants from Athenian markets — earliest example of economic sanctions as statecraft |
| Cura Annonae | Roman Empire | State grain provisioning system (from Egypt, North Africa) — political + economic instrument for food security and social stability |
| Kautilya's Arthashastra | Ancient India | Systematic treatise integrating economic governance with political and strategic imperatives |
| Tool | Who | Target/Detail |
|---|---|---|
| Export controls on semiconductors | USA | Against China — restrict access to next-gen AI and chip tech (Foreign Direct Product Rules) |
| Rare earth export restrictions | China | Key elements for defence, electronics, energy. Jan 2026: banned dual-use items to Japan (automotive, tech sectors) |
| Unreliable Entities Lists / Sanctions | China / West | China: blacklists foreign defence firms. West: sanctions against Russian entities |
| CBAM (Carbon Border Adjustment Mechanism) | EU | Rolled out 2023, fully effective 2026. Tariff on steel, cement based on embedded emissions. Targets India and China under EU methodology. |
| BRI (Belt and Road) | China | Fiscal power to build infrastructure in other countries → trade and economic dominance |
Tip: Geological metaphor used — Mid-Atlantic Ridge creates new crust while Pacific subduction zones destroy it. Like this, global trade stability needs a balance between surplus producers and deficit consumers. When this balance fractures, the global economic landscape suffers.
| Indicator | Q1 FY26 | Q2 FY26 | Q3 FY26 | Pre-COVID Avg |
|---|---|---|---|---|
| UPI Transactions | 33.3 | 33.0 | 28.7 | — |
| Passenger Vehicle Sales | 0.0 | -2.9 | 20.5 | 1.4 |
| Two-wheeler Sales | -6.2 | 7.4 | 16.9 | 2.5 |
| Three-wheeler Sales | 0.1 | 9.8 | 14.0 | 9.2 |
| Tractor Sales | 9.2 | 30.7 | 23.2 | 7.3 |
| FMCG Rural Volume | 8.4 | 7.7 | NA | NA |
| FMCG Urban Volume | 4.6 | 5.6 | NA | NA |
| Domestic Air Passengers | 5.3 | -1.9 | 5.3 | 14.9 |
| Sub-sector | H1 FY25 | H1 FY26 | Pre-COVID Avg |
|---|---|---|---|
| Industry (total) | 6.1% | 7.0% | 5.2% |
| Manufacturing | 4.8% | 8.4% | — |
| Mining & Quarrying | 3.6% | -1.8% | — |
| Electricity/Gas/Water | 6.5% | 2.4% | — |
| Construction | 9.3% | 7.4% | — |
Manufacturing share in real GDP: steady at 17–18% (decline in nominal share is due to relative price effects, NOT actual decline). Manufacturing GVO: ~38% of GDP (comparable to services).
| Indicator | Q1 FY26 | Q2 FY26 | Q3 FY26 |
|---|---|---|---|
| PMI Manufacturing | 58.1 | 58.7 | 56.9 |
| E-way bill generation | 20.5 | 23.1 | 19.4 |
| IIP | 2.0 | 4.3 | 3.6 |
| 8-core industries | 1.5 | 4.5 | 1.9 |
| Cement Production | 8.0 | 7.3 | 11.1 |
| Steel Consumption | 7.8 | 8.5 | 3.9 |
IIP, auto sales, non-oil exports, non-oil non-gold imports, PMI Mfg, PMI Services, electricity consumption, tractor sales, air passengers, aircraft movements, rail freight, port cargo, cement, steel, central govt gross tax revenues, coal production. Dataset: Jan 2006 – present.
Dynamic Factor Model (DFM) — Stock & Watson (1989). Extracts shared dynamics from multiple time series via latent factors. ARIMAX process (p=1, d=0, q=1) with quarterly DFM factor as exogenous variable.
| Statistical Series | Base Year | Release Date |
|---|---|---|
| GDP Rebasing (National Accounts) | 2022-23 | 27 February 2026 |
| IIP Rebasing | 2022-23 | 28 May 2026 |
| CPI Rebasing | 2024 | 12 February 2026 |
| ASISSE (new service survey) | — | From April 2026 |
| AIDIS (debt & investment) | — | July 2026 – June 2027 |
| Household Income Survey | — | Planned 2026 |
| Inflation Measure | FY23 | FY24 | FY25 | FY26 (Apr-Dec) |
|---|---|---|---|---|
| Headline CPI | 6.7% | 6.6% | 6.1% | 1.7% |
| Food (CPFI) | — | — | — | -1.7% |
| Core Inflation | — | — | — | 4.3% |
| Core (excl. Gold & Silver) | — | — | — | 2.9% |
Note: Core inflation persistence largely due to price spikes in precious metals (gold, silver). Adjusting for these, underlying inflation appears materially softer — limited demand-side overheating.
Key Exam Point: CPI rebasing to 2024 (using HCES 2023-24 data) is scheduled for Feb 12, 2026. New CPI will have state-specific baskets and wider price coverage. This will change inflation readings — watch for this in questions.
| Tool | Amount |
|---|---|
| CRR cuts | ₹2.5 lakh crore |
| Open Market Operations (OMOs) | ₹6.95 lakh crore |
| Forex Swap | ~$25 billion |
WALR on fresh rupee loans: ↓59 bps | WALR on outstanding rupee loans: ↓69 bps (Feb–Nov 2025)
| Metric | Value | Period |
|---|---|---|
| Total exports (merch + services) | Record USD 825.3 billion | FY25 |
| Merchandise exports growth | +2.4% | Apr–Dec 2025 |
| Services exports growth | +6.5% | Apr–Dec 2025 |
| Merchandise imports growth | +5.9% | Apr–Dec 2025 |
| Current Account Deficit (CAD) | 0.8% of GDP | H1 FY26 |
| FDI inflows growth | +16.1% | Apr–Nov 2025 |
| FDI by India abroad growth | +34.9% | Apr–Nov 2025 |
| Indicator | Q1 FY26 | Q2 FY26 | Q3 FY26 | Trend |
|---|---|---|---|---|
| Labour Force Participation Rate (LFPR) | 54.9% | 55.1% | 55.8% | ↑ Rising |
| Unemployment Rate (UR) | 5.4% | 5.2% | 4.9% | ↓ Declining |
Y = AKαL1–α | Where: Y=Output, K=Capital, L=Labour, A=TFP
| Component | Pre-pandemic (FY13-20) | FY26-30 (Estimate) |
|---|---|---|
| Capital stock growth | 7.6% | 7.6% |
| Capital share (α) | 0.49 | 0.49 |
| Labour input growth | 2.3% | 2.6% |
| Labour share (1–α) | 0.51 | 0.51 |
| Trend TFP growth | 1.9% | 1.9% |
| Implied Output growth | — | 7.0% |
GVA (Gross Value Added) = value of all goods and services produced minus intermediate inputs. GDP = GVA + Taxes on products – Subsidies. FY26: GVA grew 7.3%, GDP grew 7.4%. GDP is higher because net taxes were positive. GVA is the production-side measure; GDP includes the tax-subsidy adjustment.
PFCE (Private Final Consumption Expenditure) = total spending by households on goods and services — the demand-side engine. GFCF (Gross Fixed Capital Formation) = investment in physical assets (machines, buildings, infrastructure) — the investment engine. Together they drive GDP from the demand side.
Using economic tools (tariffs, sanctions, export controls, subsidies) to achieve political/strategic goals — not just economic ones. Example: US cutting off China's access to advanced chips is economic statecraft, not just trade policy. It's about power, not just profit.
A monthly survey of purchasing managers in manufacturing/services. Above 50 = expansion; Below 50 = contraction. It is a leading indicator — tells us where the economy is heading before official data arrives. India's PMI Mfg at 58.7 and PMI Services at 61.4 in Q2 FY26 signal very strong activity.
EU's tool to tax imported goods (steel, cement, aluminium etc.) based on their carbon footprint — so that foreign producers can't undercut EU producers who pay carbon costs. It's both a climate policy AND a trade protection tool. Fully effective from 2026. India and China are major targets.
A bank loan where the borrower has stopped repaying for 90+ days. Gross NPA = total bad loans as % of total loans. India's NPA peaked at 11.2% (March 2018) — banks were in crisis. Now at 2.2% — multi-decade low, meaning banks are healthy and can lend freely again.
The average interest rate banks charge on loans, weighted by loan size. When RBI cuts repo rate, banks are expected to pass on the cut to borrowers by reducing WALR. India: WALR on fresh loans fell 59 bps, on outstanding loans fell 69 bps — showing good monetary transmission.
CAD (Current Account Deficit) = imports of goods + services exceed exports. India's CAD: 0.8% GDP (manageable). BOP (Balance of Payments) = overall account including capital flows (FDI, FPI). BOP deficit ($6.4 bn) means more money LEFT India than entered — funded by using forex reserves.
The "residual" growth that cannot be explained by more capital or more labour — it reflects efficiency, technology, better management, innovation. In Cobb-Douglas: Y = AKαL1-α, 'A' is TFP. Rising TFP = economy doing more with the same inputs. Digital infrastructure (UPI, Aadhaar) boosts TFP.
A statistical model that extracts hidden common signals (latent factors) from many data series simultaneously. Like finding the single "pulse" of the economy behind 17 different indicators. Used in the nowcasting model to estimate GDP before official data. The "scree plot" helps decide how many factors to use.
RBI buys/sells government securities in the open market to inject or withdraw liquidity. Buying securities (OMO purchase) = puts money into banking system = eases liquidity. RBI conducted OMOs worth ₹6.95 lakh crore to support credit growth amid monetary easing.
Cura Annonae (Rome): State grain distribution system — fed citizens using grain from Egypt/North Africa. Ancient "food security + political stability" tool. Arthashastra (Kautilya/Chanakya): Ancient Indian treatise integrating economics, governance, and strategy — the world's earliest systematic text on statecraft and economic policy.
FAE places real GDP growth at 7.4% and GVA growth at 7.3% for FY26. India is the fastest-growing major economy for the 4th consecutive year. The Q3 FY26 nowcast stands at 7%.
PFCE share in GDP rose to 61.5% in FY26 — the highest since FY12. PFCE growth in H1 FY26 was 7.5%, the fastest since H1 FY23. This reflects low inflation, stable employment, rising purchasing power, and tax reforms.
The Megarian Decree (432 BCE) barred Megarian merchants from Athenian Empire's markets and ports — one of the earliest examples of economic sanctions as statecraft, contributing to the Peloponnesian War. The Survey also cites Rome's "Cura Annonae" and Kautilya's Arthashastra as historical examples.
CBAM imposes tariffs on imports like steel and cement based on embedded (carbon) emissions. Rolled out in 2023, fully effective from 2026. It targets high-pollution exporters (including India and China as per EU methodology). This is both a climate and trade policy tool.
Gross NPA declined to multi-decade lows of 2.2% as of September 2025. The peak was 11.2% in March 2018. The half-yearly slippage ratio remained stable at 0.7%. This improvement reflects policy-driven clean-up and strong corporate balance sheets.
The model uses a DFM (Stock & Watson, 1989) to extract latent factors from 17 HFIs. The quarterly factor is then used as exogenous variable in an ARIMAX (p=1, d=0, q=1) model. Q3 FY26 nowcast: 7%. Out-of-sample RMSE: 0.87.
The World Bank revised the international poverty line from USD 2.15 to USD 3.00 per day (PPP, 2021 prices) in June 2025. Under this new line, India's extreme poverty rate (2022-23) is 5.3% and lower-middle-income poverty is 23.9%.
India's total exports (merchandise + services) reached a record USD 825.3 billion in FY25. In Apr-Dec 2025: merchandise exports +2.4%, services exports +6.5%. CAD remained moderate at 0.8% of GDP in H1 FY26.
29 central labour laws consolidated into 4 Labour Codes. Key features: simplify compliance, enhance flexibility, extend social security. Gig and platform workers are now recognized with provisions for registration and social security inclusion.
GDP rebasing to 2022-23 → 27 Feb 2026. IIP rebasing → 28 May 2026. CPI rebasing to 2024 → 12 Feb 2026. These are frequently confused — memorise the dates.
Statement 1 ✓: CAD was 0.8% of GDP in H1 FY26. Statement 2 ✗: There was a BOP DEFICIT of USD 6.4 billion in H1 FY26 (vs surplus of USD 23.8 billion in H1 FY25). Statement 3 ✓: FPI net outflow of USD 3.9 billion (Apr–Dec 2025).
The three historical examples cited in the Survey are: (1) Megarian Decree by Athens (~432 BCE), (2) Rome's Cura Annonae grain system, and (3) Kautilya's Arthashastra. The British East India Company is NOT mentioned.
TOP 10 HIGH-YIELD NUMBERS from Chapter 1: (1) GDP FY26 = 7.4% (FAE); (2) FY27 projection = 6.8–7.2%; (3) PFCE share = 61.5% (highest since FY12); (4) CPI FY26 = 1.7%; (5) Repo cut = 125 bps since Feb 2025; (6) NPA = 2.2% (multi-decade low); (7) BOP deficit H1 FY26 = $6.4 bn; (8) Forex cover = 11+ months; (9) Total exports FY25 = $825.3 bn; (10) Poverty line revised to $3/day (June 2025).