India’s Economy Poised for Strong Growth in FY26 Despite Global Trade Pressures

India’s economy is projected to grow at a robust 7.4 per cent in the financial year 2025–26 (FY26), reinforcing its position as the fastest-growing major economy globally. The projection, released through the first advance estimates by the National Statistics Office (NSO), marks a notable improvement over the estimated 6.5 per cent growth in FY25. This optimistic outlook comes at a time when the global economy is grappling with slowing demand, protectionist trade policies, and rising tariff-related disruptions, particularly affecting emerging markets.

Despite these external challenges, India’s economic momentum remains largely insulated due to strong domestic fundamentals, sustained government spending, and resilient consumer demand. Analysts note that while global trade headwinds may dampen export growth, India’s internal demand-driven model continues to provide a stable growth cushion.

Fitch lifts India’s FY26 growth outlook to 7.4% on stronger spending and GST relief. (Image: Canva) | Financial Express

Services Sector Remains the Backbone of Expansion

The services sector continues to play a central role in driving India’s economic expansion in FY26. Sectors such as financial services, real estate, professional services, public administration, defence, trade, transport, and communication are expected to register solid growth. According to government estimates, services alone are projected to expand at a pace exceeding 7 per cent, reflecting sustained urban consumption, digitalisation, and expanding financial inclusion.

Public administration and defence spending have also contributed meaningfully to services growth, supported by higher government outlays and policy continuity. Tourism, hospitality, and transport services have shown steady recovery following earlier global disruptions, further strengthening the sector’s contribution to overall GDP.

Manufacturing and Infrastructure Investment Support Growth

The industrial and manufacturing sectors are expected to maintain healthy momentum in FY26, supported by increased infrastructure spending and improved capacity utilisation. Manufacturing growth is projected at around 7 per cent, aided by government initiatives such as the Production Linked Incentive (PLI) schemes and continued emphasis on domestic value creation.

Construction activity, driven by large-scale infrastructure projects in roads, railways, housing, and urban development, has emerged as a key employment and growth driver. Increased capital expenditure by both the central and state governments has reinforced investment sentiment, ensuring steady demand for core industries such as steel, cement, and machinery.

Consumption and Investment Strengthen Domestic Demand

On the demand side, private consumption remains a major pillar of growth, supported by easing inflation, stable interest rates, and rising disposable incomes. Household consumption expenditure is estimated to grow close to 7 per cent in FY26, reflecting improved purchasing power and sustained rural and urban demand.

Investment activity, measured through Gross Fixed Capital Formation (GFCF), is projected to expand by nearly 7.8 per cent. This indicates continued confidence among businesses and public institutions in long-term growth prospects. Government capital expenditure, particularly in infrastructure and public services, has played a crucial role in crowding in private investment.

Policy Reforms and Monetary Support Provide Tailwinds

India’s growth outlook is also supported by structural and policy measures implemented over recent years. Rationalisation under the Goods and Services Tax (GST) regime has reduced costs across several sectors, boosting consumption and improving tax compliance. Additionally, moderation in inflation has allowed the Reserve Bank of India to adopt a more accommodative stance, supporting credit growth and investment demand.

Fiscal discipline combined with targeted spending has helped maintain macroeconomic stability, while reforms in logistics, digital payments, and ease of doing business have enhanced productivity and efficiency across the economy.

Global Headwinds and Diverging Forecasts

While domestic projections remain optimistic, global institutions have adopted a more cautious stance. Agencies such as the World Bank and the International Monetary Fund (IMF) have projected slightly lower growth rates for India, citing global trade tensions, geopolitical risks, and slower world demand. Rising tariffs imposed by major economies, particularly the United States, have raised concerns over export competitiveness, although their impact on India’s overall growth remains limited so far.

Economists also warn that nominal GDP growth may slow due to lower price pressures, even as real growth remains strong. Some analysts anticipate moderation in the second half of FY26, influenced by base effects and global economic uncertainties.

The MGMM Outlook

India’s projected 7.4 per cent growth in FY26 highlights the strength of an economy that is increasingly driven by its own domestic engines rather than global tailwinds. Even as international trade faces uncertainty from protectionism, tariffs, and slowing demand, India’s internal fundamentals—robust consumption, sustained government spending, and a services-led growth model—continue to provide stability. The services sector remains the backbone of expansion, supported by finance, public administration, defence, transport, and digital-driven activities, while manufacturing and construction benefit from infrastructure push, policy continuity, and initiatives such as the PLI schemes. Together, these factors reinforce India’s position as the fastest-growing major economy despite a challenging global backdrop.

On the demand side, rising household consumption and strong investment activity underline confidence in long-term growth prospects. Easing inflation, supportive monetary conditions, and steady income growth have strengthened purchasing power across urban and rural areas, while government-led capital expenditure has helped crowd in private investment. Structural reforms in taxation, logistics, digital payments, and ease of doing business continue to improve efficiency and productivity, cushioning the economy from external shocks. Although global institutions remain cautious due to geopolitical risks and trade tensions, India’s diversified economic structure and reform-driven trajectory suggest resilience, with domestic demand and investment likely to remain the key pillars sustaining momentum in FY26.

(Sources: Business Standard, Financial Express, Firstpost)