History doesn’t end today, our old compass has run its course. Here’s a new one for Indi

Tomorrow, as we begin the new year, we seek a new elusive compass. We have relied on a compass that had run its course. We were forewarned that “the old world is dying and the new world struggles to be born”. Instead, after a long period of complacency, we now face fractured trade and supply chains, politicised finance, geopolitical tensions, and rudderless multilateral institutions. No rulebook commands universal trust.

This year’s defining story could be the requiem of the post-Cold War order. Not through a single collapse but through a thousand cuts. The leadership change in Washington supercharged great-power rivalries. As the ghost of mercantilism displaced multilateralism, India held on to its faith in a multilateral rules-based order and national interest as the compass of independent foreign policy.

Tariffs surged from a universal 10 per cent rate to country-specific duties of up to 50 per cent. We responded by pursuing FTAs with vigour, harnessing trade as an engine of growth. Allowing an orderly recalibration of exchange rates could mitigate loss of competitiveness. Notwithstanding recent export performance, India’s current account deficit could widen.

Money, too, became overtly political. Parts of the Global South sought to reduce dependence on the dollar. China’s reduction of US Treasury holdings to its lowest in 17 years was more than symbolic. BRICS advanced de-dollarisation as financial sovereignty acquired centre-stage. India promoted rupee settlement mechanisms, enabling trade in rupees with over 22 countries, and encouraged investment of rupee balances in Indian assets.

The US faced growing fiscal strain as the federal deficit reached 5.9 per cent of GDP. After an unprecedented shutdown, the Congressional Budget Office projects spending rising from 23.3 per cent of GDP in 2025 to 26.6 per cent by 2055, while revenues reach only 19.3 per cent. Kenneth Rogoff’s book, Our Dollar, Your Problem, suggests many countries no longer accept the dollar burden. India reduced exposure by cutting US Treasury holdings by about $50 billion last year.

War cast a long shadow, as Ukraine, Gaza and Sudan displaced over 12 million people. India pursued cautious diplomacy: Prime Minister Narendra Modi crafted diplomacy to say India is “on the side of peace” in Ukraine, engaged with Moscow, called for a Gaza ceasefire, sent humanitarian aid, and espoused a two-state solution, while condemning terrorism in multiple forms and the loss of innocent lives.

Climate is existential, beyond fiscal, financial and development issues. Insured losses hit $145 billion in 2025 and could exceed $300 billion in the future. Besides losses from heat, desertification and rising sea levels, the past decade alone saw more than $2 trillion in losses affecting 1.6 billion people. India accelerated its green transition, achieving 50 per cent non-fossil capacity five years ahead of Paris NDCs.

Multilateral institutions from the mid-20th century order grapple with multiple dilemmas as shareholder power clashes with 21st-century global needs. India continued its leadership of the Global South seeking decisive multilateral reforms to make institutions like the UN Security Council more representative.

That was the year we leave behind. A year of contradictions, uncertainty and incoherence. What should guide us into 2026?

First, we must accept that the era of grand global designs may be over. Coalitions will be ad hoc, agreements partial and temporary. For India, strategic navigation in a fragmented world demands flexibility, adaptability and resilience. India should deepen issue-based coalitions and Global South arrangements, strengthen crisis management and endeavour to conserve strategic autonomy in this transactional environment.

Second, the axis of global debate is shifting from democracy and development to, equally, demography and development. By 2030, one in six people globally will be aged over 60. These seismic changes necessitate a new global compact. But who is best suited to deliberate on this: The G20, the United Nations’ International Organisation for Migration (IOM) or other new regional formations? Migration is and will be a compelling issue. Demographic shifts given ageing differentials and the promotion of human welfare through productivity will be challenging in preserving the cultural ethos of sovereign nations. This will be so even as upskilling of millions of young workers advances through education and healthcare. India’s youth bulge must become a source of strength rather than a liability. This is true both among and within nations. Some states have shown the way through greater appetite for labour mobility and partnerships with ageing economies.

Third, we should expect a world neither at war nor at peace. An unreformed United Nations, especially its Security Council, is effectively emasculated. The G20 is significant but not representative. The multilateral development banks are too focused on economic and social consequences. Does the world have the appetite for a fresh rethink on credible global governance? India must continue its multi-alignment strategy. It should diversify defence acquisitions to enhance deterrence without compromising strategic autonomy. It can lead security dialogues and mediate conflicts in the Indo-Pacific and West Asia when big-power institutions fail.

Fourth, bond markets will discipline advanced economies with shrinking fiscal space. Deeper cooperation among central bankers, possibly through a broadened Basel forum, could propose a credible, consensus-based path for reducing global debt. For India, low inflation has kept nominal GDP growth at 8.7 per cent, weakening tax buoyancy and making the 4.4 per cent deficit target harder to meet, underscoring the need to continue fiscal discipline.

Fifth, technology will inspire both hope and anxiety. With global AI funding reaching $120 billion in Q3, India must seize this wave by scaling up investment in AI and quantum computing R&D. Even beyond Budget 2026, India should strengthen incentives for technology start-ups, expand digital skills programmes, and enhance partnerships in higher education, building on the flexibility offered by the NEP and the “Campus-Within-Campus” approach. India’s timely AI governance guidelines must be backed by enforcement, data protection and international cooperation. Technology remains crucial in tackling congestion and pollution, which in turn affect productivity in Indian cities.

Sixth, India should align climate action with growth, through electrification, accelerating renewables, electric vehicles, and green hydrogen. Leading the International Solar Alliance can help countries of the South, including India, garner large productivity-enhancing investments in select renewable technology and human capital. This will mainstream climate strategy.

For India, today’s constellations signal new opportunities. Insights from the LSE-India Advisory Board, where we serve as co-chairs, and a recent book, The Growth Story of the 21st Century (authored by Nicholas Stern), have directed the compass toward exporting value, harnessing the demographic dividend, deepening capital markets, backing frontier technologies, and building sound and efficient infrastructure.

The way forward lies in sustaining macroeconomic stability. We must harness our extraordinary entrepreneurship by freeing land, labour, and capital through Centre-led reforms across states. Leveraging the multiplier effects of global capability centres (GCCs) is key. We should continue pursuing new, monitorable policies, including a more efficient legal system, to attract larger global investment. This will enhance capital availability and productivity, improving the incremental capital-output ratio.

History did not end in 2025. As 2026 begins, India must navigate without old maps, grasping its chance to shape the new world. The new compass must overcome the false hiatus between democracy, development and demographics.

Singh is president, Institute of Economic Growth and was chairman, Fifteenth Finance Commission. Stern is chairman of the Grantham Research Institute on Climate Change and the Environment and member of the House of Lords