India’s agriculture and rural economy emerged as a key stabilising force in a year of global uncertainty, with favourable monsoons, contained food inflation and rising productivity supporting growth, even as the Economic Survey 2025–26 warned that fiscal populism by states, volatile capital flows and global trade disruptions could undermine rural incomes and long-term farm competitiveness.
The Survey said agriculture continued to play a crucial counter-cyclical role, cushioning the economy amid geopolitical shocks and trade disruptions, while stressing that future gains will depend less on subsidies and more on productivity, diversification and food system reforms.
Food inflation eased, but remains the main macro risk
Headline inflation remained volatile in 2025, driven largely by food prices, but the Survey noted that core inflation excluding food, fuel, gold and silver remained subdued, indicating strengthening supply-side conditions and improved logistics.
Better rainfall distribution, stable reservoir levels and improved crop prospects helped anchor cereal and pulse output, easing pressure on rural households and urban consumers alike. However, the Survey cautioned that food inflation remains the single biggest macroeconomic risk, particularly in a world of climate volatility and fragmented global trade.
The government’s food management system — including buffer stocks, procurement and targeted releases — played a key role in containing price spikes, though the Survey argued that long-term stability requires productivity gains rather than repeated market intervention.
Productivity, not procurement, must drive farm incomes
The Survey emphasised that raising agricultural productivity — rather than expanding price support — is essential to sustaining rural incomes as India transitions to a higher-income economy.
It highlighted policy interventions such as crop diversification, improved seed replacement rates, expansion of micro-irrigation and digital agriculture platforms as critical drivers of recent gains. Institutional reforms, including Farmer-Producer Organisations (FPOs), electronic National Agriculture Market (e-NAM) integration and warehouse receipt financing, were cited as gradually improving farmers’ market access.
However, the Survey warned that excessive reliance on minimum support prices and unconditional income transfers risks distorting cropping patterns, crowding out investment and weakening incentives for skill development in rural areas.
Rural demand steady, but state finances a concern
Rural consumption remained resilient in 2025, supported by farm output, government transfers and public investment in roads, housing, drinking water and electrification. Programmes such as the Jal Jeevan Mission and rural infrastructure spending helped ease non-farm employment constraints and raised living standards.
At the same time, the Survey expressed concern over rising revenue deficits in several states, noting that expanding unconditional cash transfers could crowd out capital expenditure critical for rural productivity — including irrigation, storage, rural logistics and extension services.
As global investors increasingly assess general government finances, weak fiscal discipline at the state level could raise borrowing costs, indirectly squeezing resources available for agriculture and rural development.
Climate resilience and food systems under strain
The Survey devoted significant attention to climate risks facing agriculture, warning that adaptation will be as important as mitigation for India’s food security.
It called for faster scaling of climate-resilient crop varieties, precision farming, improved water-use efficiency and decentralised storage to reduce post-harvest losses. Sequencing the green transition carefully is critical, it said, to avoid raising input costs — particularly energy and fertilisers — for farmers and agro-processing units.
The Survey also flagged the risk that poorly designed environmental regulations could unintentionally burden small farmers and rural enterprises, underscoring the need for region-specific, risk-based governance.
Manufacturing, trade and the rural economy link
While services exports continue to support the balance of payments, the Survey argued that manufacturing-led export growth is essential for durable rural prosperity, as agriculture alone cannot absorb India’s growing workforce.
Recent trade agreements, including the free trade agreement with the European Union, could expand demand for labour-intensive agro-based and food-processing exports, provided India can produce competitively and meet quality standards.
Scaling agro-processing, improving cold chains and lowering logistics costs were identified as key to linking farmers more effectively to global and domestic value chains.
Rural transformation beyond agriculture
The Survey said India’s rural economy is increasingly diversified, with non-farm employment, construction, logistics and services playing a growing role in income generation. However, skill gaps and weak local institutions continue to limit productivity gains outside agriculture.
It called for deeper convergence between education, skilling and rural enterprise development, warning that unconditional transfers, while politically attractive, may weaken incentives for upskilling and formal employment over time.
Outlook: stability with structural risks
Looking ahead, the Survey said agriculture will remain central to macroeconomic stability in an uncertain global environment, but warned that food security, rural incomes and farm competitiveness cannot be insulated indefinitely from global shocks, climate stress and fiscal slippage.
Sustained rural growth, it said, will depend on shifting from protection and procurement towards productivity, diversification and resilient food systems — a transition that requires coordinated action by the Centre, states and the private sector.
“India must balance short-term rural support with long-term capacity building,” the Survey noted, arguing that delayed gratification through investment in productivity and institutions will ultimately yield more durable gains for farmers and rural households.