The Indian economy demonstrated remarkable resilience in the fiscal year 2026-2026, with a real GDP growth of 7.7% year over year, surpassing initial government estimates. This growth was driven by robust domestic demand, which remained strong despite a challenging global backdrop. The final quarter saw a growth rate of 7.8%, indicating the economy’s enduring strength.
The expenditure side of GDP was primarily driven by domestic demand. Private final consumption expenditure grew by 7.1% in the last quarter, supported by tax incentives, increased disposable income, and stronger purchasing power. Investment also remained strong, with gross fixed capital formation rising by 10.8% in the fourth quarter and 8.2% for the full year. However, exports softened, rising by only 3.7% in the last quarter due to shipping disruptions caused by the Middle East conflict.
Key Drivers of Economic Growth
The production side of the economy saw strong performances in both manufacturing and services. Manufacturing GVA rose by 10.7% for the whole year, despite moderating to 7.3% in the fourth quarter. The services sector was the main growth pillar, with the tertiary sector growing by 9.9% in the last quarter and 9.3% for the full year. However, growth in the agriculture and allied activities sector moderated to 3.6% in the last quarter and 3% for the full fiscal.
Inflation fell to a multiyear low as food and fuel prices eased, aiding consumer spending. This also resulted in a subdued GDP deflator, keeping nominal GDP growth at 8.9%. Despite softer growth in agricultural GVA, rural demand remained healthy, as evidenced by strong two-wheeler and tractor sales, and growth in the fast-moving consumer goods sector.
Challenges Ahead
While India ended the last fiscal with strong momentum, vulnerabilities such as capital outflows and currency depreciation persisted. Entering the new fiscal year, India’s growth outlook is increasingly exposed to external headwinds and macro-financial risks. Performance in fiscal 2026-2027 will likely be shaped by several key risks, including capital-flow volatility, currency depreciation, inflationary pressures, and fiscal pressures.
Capital-flow volatility has been a significant challenge, with foreign portfolio investment outflows of around US$18 billion in the last fiscal. These outflows surged to US$21.6 billion between March and April 2026. While there might be intermittent disruptions to global supply chains, investors will increasingly factor them into their decision-making.
Currency depreciation has also been a concern, with the Indian rupee depreciating by nearly 10% against the US dollar and over 15% against the euro during the last fiscal. Following the start of the Middle East conflict, higher oil import risks, the strength of the US dollar, and tighter global financial conditions caused the rupee to depreciate further. However, the rupee has since regained some of its lost ground and is now hovering above 94 per US dollar.
Inflationary pressures have been driven by rising prices of crude oil, essential minerals, fertilizers, and palm oil, combined with a depreciating currency. Despite government measures to cushion the domestic economy, the wholesale price index inched up to 8.2% in June due to higher fuel, freight, and input costs, while the consumer price index rose to 3.9%. With inflation having moderated to 2.1% in the last fiscal, a low base effect is expected to push it up to 5.5% in fiscal 2026-2027, before it eases to 4.2% the following fiscal.
Fiscal pressures have also been a concern, with government interventions to contain inflation and support consumer spending shifting part of the external shock burden onto public finances. Subsidy spending rose sharply, accounting for 23% of the annual budget allocation between January and March 2026. Higher subsidies for food production and farming, along with lower revenue buoyancy due to cuts in customs taxes this year, may cause the fiscal deficit to remain elevated.
Navigating the Future
In fiscal 2026-2027, economic performance will largely depend on how Indian policymakers navigate an increasingly uncertain external environment without compromising on domestic growth momentum. We expect economic growth to remain modest in the first half of the year and pick up in the second half, driven by a demand surge during the festival season and the gradual easing of geopolitical uncertainties.
Trade deals with the United States, United Kingdom, and the European Union are expected to usher in trade and private investments from 2027 onward. In Deloitte’s optimistic scenario, growth in fiscal 2026 and 2027 is likely to range between 6.5% and 6.8%, before crossing 7% in the next fiscal year.
Building durable external resilience will require more than just strong domestic demand—it will also require a stronger trade architecture. In this context, India’s recent free trade agreements (FTAs) and ongoing trade negotiations assume greater significance. Over the past two decades, India has signed 22 FTAs, eight of them in the last six years, reflecting a more strategic approach to trade policy.
The newer agreements aim to expand exports, strengthen supply-chain resilience, and diversify trade. However, India also needs the right industrial policy reforms to remain competitive as it integrates with global supply chains. Industrial policy must complement trade policy, with FTAs helping integrate India more deeply into global supply chains and diversify access to critical inputs. At the same time, industrial policies such as production-linked incentives, infrastructure development, and domestic capability creation will enable India to gradually substitute imported intermediates with competitive domestic production.
