Tax incentives, reduction of interest rates... should improve urban demand

S Mahendra Dev, newly appointed chairman of the Economic Advisory Council to the Prime Minister (EAC-PM), says India is on track to grow at 6.5 per cent in 2025-26 (FY26) despite global headwinds. In an interview with Sanjeeb Mukherjee and Indivjal Dhasmana in New Delhi, he discusses a wide range of issues, including the impact of artificial intelligence (AI) on jobs, demand trends, and increasing the share of manufacturing in the economy. Edited excerpts:

- S Mahendra Dev

The rural economy and consumption have done well in 2024-25. Do you think they will remain a big growth driver in FY26 as well?

The average growth rate of agriculture during the past eight years—2017-18 to 2024-25—was 4.6 per cent per annum. FY25 also recorded a growth rate of 4.6 per cent. It contributed significantly to the GVA (gross value added) growth of 6.4 per cent last year. The IMD (India Meteorological Department) expects an above-normal monsoon this year, which augurs well for higher agricultural growth, rural consumption, and lower inflation. Therefore, we can expect that the rural economy will do well in FY26 as well.

However, urban demand is subdued. What should be done to improve it?

Tax incentives in the Budget, a reduction of interest rates by the Reserve Bank of India (RBI), and enhanced government capital expenditure should improve urban demand. The PMI (Purchasing Managers' Index) for services stood strong at 58.8 in May 2025. This indicates significant expansion in activity. The services sector is expected to maintain momentum. High-frequency indicators also show some pickup in passenger vehicle sales, although there are fluctuations from one month to another. The CPI (Consumer Price Index) inflation in May 2025 recorded the lowest level in recent years at 2.82 per cent, while food inflation stood at 0.99 per cent—the lowest since October 2021. This should increase urban demand. Of course, there can be global headwinds that may pull it down.

What are your projections for GDP growth in FY26?

The RBI projected GDP growth at 6.5 per cent, while the Economic Survey gave a range of 6.3-6.8 per cent for FY26. A 6.5 per cent GDP growth for FY26 is feasible, given many domestic tailwinds, in spite of global uncertainties.