Turning resilience into momentum

This is a thought leadership report issued by the S&P Global Institute. This report does not constitute a rating action, neither was it discussed by a rating committee.

India's economy has proven resilient post-pandemic, outperforming most major economies despite geopolitical disruptions. A public infrastructure push, rapid digital infrastructure build-out, targeted incentives for manufacturing, welfare schemes and economic reforms have contributed to India's standout performance. The Economic Survey 2025-26 consequently raised the country's growth potential to 7.0% from an earlier estimate of 6.5%.

India faced among the highest tariffs imposed by the US in 2025-26, yet the economy grew by 7.7% — more than 100 basis points above policymaker and analyst predictions.

India began fiscal year 2026-27 with strong macroeconomic fundamentals: a healthy growth-inflation mix, robust bank and corporate balance sheets, and a comfortable current account position. But as the economy is now more integrated into global trade and capital flows, it is less insulated from global shocks.

India's GDP growth of 7.8% in the first quarter exceeded expectations, continuing a pattern seen over the past several quarters. High-frequency indicators such as industrial production, services activity, strong merchandise exports, and goods and services tax collections indicated healthy economic momentum in the first quarter. The growth outperformance underscores the strength of India's domestic drivers and its ability to navigate an increasingly uncertain global environment.

Figure 1 details the factors behind India's outperformance in 2025-26, along with the reasons a slowdown is expected in the current fiscal year. 

Three buffers add to India’s resilience: 

1. Foreign exchange reserves cover more than nine months of imports as of July 31. While we expect the current account deficit to rise to 1.5% of GDP in fiscal year 2026 from 0.6% in fiscal year 2025, it will remain within the comfort zone.
2. Balance sheet strength of borrowers and lenders. Crisil's credit rating upgrades outnumber its downgrades, although the upgrade-to-downgrade ratio moderated to 1.50 times in the second half of fiscal year 2026 from 2.17 times in the first half. Banks' gross nonperforming assets are at a decade low of 1.8% at the end of fiscal year 2026.
3. At 92.6 million tons, food grain stocks were at more than twice their buffer norms as of July 2026.

This ongoing conflict has followed a cycle of escalation and de-escalation. While periods of de-escalation have given many economies breathing room, heightened uncertainty, supply chain disruptions, high and volatile Brent crude oil prices, and elevated freight and insurance costs have become the norm. Crisil expects crude oil prices to range between $82 and $87 per barrel in the current fiscal year, compared with $70 per barrel in the last.

Improvements in logistics, a stable business environment and reforms that make doing business easier, such as deregulation and stronger contract enforcement, will play an important role in improving the private investment climate.

Why FDI needs a deeper push

India has steadily liberalized its FDI regime, including opening the insurance sector to full foreign ownership. Yet, at about 2% of GDP, gross inflows remain modest relative to regional peers and the size of the economy and are below workers' remittance inflows.

Global investment is increasingly concentrated in strategic sectors and geographies. UN Trade and Development estimates that AI infrastructure, semiconductors, critical minerals, energy-transition technologies and advanced manufacturing accounted for 44% of global greenfield FDI in 2025, up from 16% in 2020. India is benefiting from this trend, with Google's $14.5 billion AI and data center commitment marking the largest announced greenfield project in developing Asia in 2025.

Yet India is in competition for a shrinking pool of global capital against economies with deeper manufacturing and supply chain ecosystems. The key question is whether India is securing a sufficiently large share of the investment that is shaping the next global investment cycle.

Role of free trade agreements in supporting exports, manufacturing and FDI 

India is also rethinking its approach to free trade agreements (FTAs), which are increasingly being used to attract investment, deepen supply chain integration and strengthen India’s position in strategic sectors, rather than as instruments for tariff reduction and market access. Recently signed FTAs and those nearing completion will improve market access and could be vehicles for foreign investment. Agreements such as the India-EFTA Trade and Economic Partnership Agreement and the India-New Zealand FTA place explicit emphasis on investment promotion and commitments.

With six trade deals signed over the past four years, including one with the EU to be signed later this year, India will secure FTAs covering more than half of the world's top importing economies. Improved market access can boost exports, encourage domestic private investment in beneficiary sectors and attract additional FDI.

Manufacturing exports will benefit from recently signed FTAs in a phased manner, with labor-intensive sectors such as garments, leather, gems and jewelry likely to be the earliest beneficiaries, according to Crisil Intelligence. 

To achieve the Viksit Bharat 2047 vision, India must sustain higher growth through increased investment, with a greater role for the private sector and foreign direct investment.

Recent FTAs could enhance exports, attract foreign investment, strengthen supply chain integration and, over time, improve India's position in strategic global industries.

FTAs are not an end in themselves, and they must be complemented by efforts to improve India's competitiveness. Ongoing focus on infrastructure build-out, deregulation and increased spending on research and development will be critical to improving competitiveness, durably reviving private capital expenditure, and realizing the export and investment potential of recently signed agreements.