R. Suryamurthy
While India’s domestic economy displays notable resilience across various sectors, the Finance Ministry’s latest monthly economic review flags global uncertainties as a primary risk to the nation’s growth outlook for FY26. Despite positive indicators in consumption, a recovering manufacturing sector, and easing inflationary pressures, the report emphasises that external headwinds could derail this momentum.
The review points to encouraging indicators in the fourth quarter of FY25, such as strong Goods and Services Tax (GST) collections and increased E-way bill generation, suggesting sustained economic activity. Consumer sentiment is also on an upward trajectory, with the Reserve Bank of India’s (RBI) recent survey indicating growing optimism about both current conditions and future prospects. Rural demand remains steady, supported by increased consumption reported by a majority of households surveyed by the National Bank for Agriculture and Rural Development (NABARD).
The manufacturing sector is showing promising signs of revival. The RBI’s Industrial Outlook Survey reflects improved production levels, stronger order books, and better capacity utilisation. This is further corroborated by the quarterly Order Books, Inventories, and Capacity Utilisation Survey (OBICUS), which showed enhanced utilisation rates in Q3 FY25, signalling strengthening demand and industrial recovery.
A significant positive development is the softening of inflationary pressures. Retail inflation witnessed a sharp decline from 5.4 per cent in FY24 to a six-year low of 4.6 per cent in FY25. Notably, the inflation rate in March 2025 marked the lowest year-on-year figure since September 2019, driven by a sharp fall in food inflation, aided by government interventions and favourable harvests. While the overall inflation outlook has improved, the ministry cautions that geopolitical uncertainties warrant continued vigilance.
The government’s commitment to fiscal consolidation is also highlighted as a key factor bolstering economic stability. The continuous decline in general government fiscal deficits since the COVID-19 peak of 2020-21 has freed up domestic savings to finance private sector investment. The report emphasises that a further glide path of public debt reduction will provide additional resources for private investment and lower the overall cost of capital in the economy.
The financial sector remains resilient amidst global uncertainty. As of September 2024, the banking sector’s gross non-performing assets (GNPA) ratio improved to 2.6 per cent, indicating strong fundamentals. Stress tests confirm the banking system’s ability to maintain capital adequacy even under adverse conditions. While debt market yields have softened, Indian equity markets have shown recovery, supported by increased equity inflows. The Indian Rupee has also demonstrated relative strength and stability despite global volatility in Q4 FY25.
On the external front, while India’s total trade deficit has increased to USD 94.3 billion in FY25 from USD 78.4 billion in FY24, the current account deficit has narrowed to 1.1 per cent of the GDP in Q3 FY25, compared to 1.8 per cent in the previous quarter. The country’s foreign exchange reserves remain robust, standing at USD 677.8 billion as of April 11, 2025, providing a comfortable import cover of about 11 months. The external debt stood at 19.1 per cent of the GDP at the end of December 2024.
Labour market indicators have remained stable, with formal job creation on the rise, as indicated by increasing net payroll additions under the Employee Provident Fund Organisation. While white-collar hiring experienced a slowdown, sectors like Artificial Intelligence/Machine Learning (AI/ML) and Fast-Moving Consumer Goods (FMCG) demonstrated resilience. The employment sub-indices of the Services Purchasing Managers Index (PMI) indicated a deceleration in hiring, whereas employment in manufacturing continued to show strength.
Looking ahead, the Finance Ministry expresses a positive outlook for the Indian economy in FY26, supported by bright prospects for the agriculture sector, a reviving manufacturing sector, and a resilient services sector. However, it cautions that uncertainties stemming from global developments pose a key risk to the growth outlook, particularly the potential impact of prolonged uncertainty on private sector capital formation plans. The report specifically highlights that beyond direct trade impacts, the perception of prolonged global uncertainty poses a significant threat. This apprehension could lead the private sector to postpone crucial capital formation plans, thereby dampening investment and hindering economic expansion. The ministry stresses the urgency for both policymakers and the private sector to proactively address this risk and prevent uncertainty from becoming a self-fulfilling prophecy.
Although the report acknowledges India’s strong macroeconomic fundamentals, resilient external sector, and declining fiscal deficit as growth drivers, it underscores that these strengths could be undermined if the private sector adopts a wait-and-see approach due to global instability. The potential for delayed investment decisions represents a critical challenge to sustaining India’s current favourable economic trajectory.
Furthermore, while the review notes the bright prospects for agriculture and the revival in manufacturing and services, it cautions that ongoing global trade disruptions warrant close monitoring and the need for export diversification. Empirical research indicating that China’s exports grew faster in sectors with reduced import duties on inputs underscores the importance of addressing compliance, inspection, and logistics hurdles to enhance India’s export competitiveness in a volatile global landscape. This suggests that India’s external trade performance, a key component of growth, remains vulnerable to international headwinds.
The government’s commitment to fiscal consolidation, evidenced by the continuously declining general government fiscal deficits since the COVID-19 peak of 2020-21, is expected to enhance the availability of domestic savings for private sector investment. The planned reduction of public debt to GDP will further create additional domestic resources and potentially lower public sector borrowing costs, contributing to an overall lower cost of capital in the economy.
The anticipated softening of food inflation in FY26, supported by healthy reservoir levels, record wheat output projections, higher pulse production estimates, robust kharif arrivals, and declining inflation expectations from RBI surveys, offers a positive backdrop. Falling crude oil prices also contribute to this disinflationary trend. However, the report reiterates that global uncertainties, such as trade tensions and geopolitical risks, could disrupt supplies or cause prices to rise, posing a threat to this favourable inflation outlook.
While the Finance Ministry presents an overall positive outlook for the Indian economy, it explicitly identifies uncertainties stemming from global developments as the foremost risk to its growth prospects in the coming fiscal year. The report underscores the critical need for strategic action to mitigate these risks and ensure that the domestic economic momentum is not derailed by external volatility. The emphasis on facilitating private capital formation and addressing global headwinds highlights the delicate balance India must navigate to sustain its growth trajectory in the face of an evolving international landscape.