Despite a turbulent global economic environment, India's economic outlook remains largely positive, according to the Finance Ministry's latest monthly economic review. The report highlights resilient domestic supply and demand, with inflation remaining within the target range and a favorable monsoon season bolstering the domestic economy as it enters the second quarter of fiscal year 2026.
Several factors contribute to this optimism. The Indian economy experienced faster-than-expected growth of 7.8% in the first quarter of fiscal year 2026, driven by strong performance in the manufacturing, construction, and service sectors. The service sector, in particular, saw robust growth of 9.3%, with all components, including trade, hotels, transport, communication, financial, real estate, and public administration, contributing to the upward trend. Domestic demand has played a key role in supporting growth and is expected to continue doing so in the coming months.
Recognizing potential risks from the external sector, the government has implemented measures to strengthen domestic growth drivers. A rationalization of the Goods and Services Tax (GST) regime is expected to lower the tax burden on consumers, boost consumption, and provide a cushion against tariff impacts. This move should also improve demand visibility for firms, encouraging them to invest in additional capacity. The government's ongoing reform agenda, including regulatory reforms and infrastructure development, is expected to further support economic momentum.
The Finance Ministry report also notes that India's macroeconomic fundamentals have remained resilient despite global headwinds such as trade tensions, geopolitical volatility, and external uncertainties. Various forecasters, including S&P, ICRA, and the Reserve Bank of India's Survey of Professional Forecasters, project GDP growth rates for fiscal year 2026 to be in the range of 6.2% to 6.5%. The OECD has also raised its GDP growth forecast for India to 6.7% for 2025, citing support from monetary and fiscal policy easing and GST reforms.
Furthermore, India's external sector has demonstrated resilience, with strong service exports and remittances offsetting the merchandise trade deficit. Gross Foreign Direct Investment (FDI) inflows continue to rise, highlighting India's attractiveness as an investment destination. The government's progress in fiscal consolidation, driven by strong tax revenues and rationalized subsidies, has also contributed to a manageable level of debt and strengthened external stability.
The Finance Ministry has flagged concerns about slow credit growth and private investment, which could restrict acceleration in economic momentum. However, it is optimistic that initiatives like the Employment Linked Incentive (ELI) scheme will encourage corporates to invest and create jobs.
Several international agencies have also recognized India's strong economic performance and potential. S&P Global raised India's long-term sovereign credit rating to 'BBB' from 'BBB-', while Rating and Investment Information, Inc. (R&I), Japan, upgraded India's long-term sovereign credit rating to 'BBB+' from 'BBB'. These upgrades reflect increasing global confidence in India's macroeconomic fundamentals, prudent fiscal management, and medium-term growth prospects. The IMF has also revised its forecast for India's economic growth to 6.4% for both 2025 and 2026.
Overall, the Finance Ministry's report paints a positive picture of India's economic outlook. While acknowledging the challenges posed by the global environment, the report emphasizes the country's strong domestic fundamentals, government reforms, and resilient external sector. With continued vigilance against external shocks and global market volatility, India is expected to maintain its position as one of the fastest-growing major economies in the world.
