2026 will be the year of resilience for India. This is expected to be mainly in domestic demand. In addition, there are expected to be indecisive reforms in fiscal, monetary, and labour policies. It is besides recalibrations in trade policies.
2025 was a global inflection point: policy overhauls across Western economies. This was particularly so in trade, investments and industrial policy. They triggered spillover effects across all major global markets. India wasn’t immune to these global shifts. Intricately connected to global value chains, India, which is the world’s 4th-largest economy, is also a major global trading partner and also experienced external shocks and acute effects from these global policy changes. These included tariff escalations, besides volatile capital flows.
Yet, despite headwinds, demand resilience, a reset in trade & investment outlook, and policy reforms stood out. India focused squarely on its biggest strength of domestic demand to sustain growth, buoyant as inflation levels remained below 1.8% on average through the fiscal year. With slower global demand and rising trade frictions, as well as a delicate domestic consumption environment, India carefully deployed a sequence of fiscal, monetary, and trade reforms. It not only cushioned the economy but also laid the foundation for future growth.
March 2025 was a setback month, which moved with efforts comprised in managing external shocks & strengthening domestic fundamentals. Consequently, a major milestone came during August 2025. This was when S&P upgraded India’s sovereign rating by a single step from BBB- to BBB. This was the first such upgrade in 18 years, since 2007.
As India moves into 2026, several themes will shape the next phase of economic growth, which may demand the same level of pragmatism. What is expected is a full fiscal year growth to be revised substantially upward. The 3rd quarter values are likely to remain strong due to festive spending. Economic growth is expected to range between 7.5% & 7.38% during fiscal 2025–2026. Correspondingly, the value is between 6.6% & 6.9% during fiscal 2026–2027. The latter deflated values would be buoyed by the rollout of new goods and services tax (GST) rules, besides slowing inflation.
Domestic demand resilience
India’s economic growth value expanded by 8.2% year over year. This was during the second quarter of fiscal 2025–2026. This reinforced expectations of an upward revision in full-year growth. Global headwinds such as higher U.S. tariffs & volatile capital outflows were major setbacks for most nations. However, India was capable of posting an impressive 8% growth rate during the first half of the fiscal year. This was achieved by robust private consumption & investment. It was aided by easing inflation & favourable rural conditions.
Key drivers
Consumption
Private final consumption expenditure grew by 7.9% in the 2nd quarter. It was supported by the lowest inflation level of 1.7% witnessed in a decade. This led to rising disposable incomes from tax & GST relief, besides better rainfall. As a result, consumption grew by 7.5% in the first half of the fiscal year.
Investment
Government capital expenditure utilisation increased to 51.8% in the 1st half of the fiscal year (versus 37.3% the year before). This boosted gross fixed capital formation growth to 7.6% (versus 6.7% the year before).
Sectoral strength
Gross value added (GVA) grew by 8.1%, especially during the 2nd quarter of the fiscal year. The registered contribution from manufacturing was up 9.1%. This was coupled with services surging to 9.2%. These were led mainly by financial & professional services. GVA growth for the 1st half of the year was around 7.8%. Services tend to now contribute 60% of GVA with 48% of exports, underscoring their strategic role.
Exports
After a strong 1st quarter, exports moderated in the 2nd quarter, mainly due to higher U.S. tariffs focused on Indian exports (including a 50% tariff on select goods). However, a trade rebound is expected, which would be supported by upcoming trade agreements with both the United States & the European Union (EU). This included diversifications into services, electronics, and pharmaceuticals.
