India Forward — 17 September 2025
India’s growth realigns with shifting global trends
Although domestic factors largely drive economic growth in India, global trade uncertainties are propelling a realignment of its trajectory.
By Dharmakirti Joshi
Highlights
India is the world’s fastest-growing major economy, with GDP forecast to grow 6.5% in fiscal 2026, according to Crisil.
The economic outlook of India for fiscal 2026 and beyond will be influenced by global tariff shocks as well as how domestic buffers and policy levers can be shaped to provide a cushion.
For India to achieve developed country status by 2047, the government and other public stakeholders must balance enhancing domestic growth drivers, attracting foreign capital and improving external market access.
Despite shifting global trade policies, India is still the world’s fastest-growing major economy. The country’s GDP is forecast to grow 6.5% in fiscal 2026, as it did in fiscal 2025, reflecting its domestically driven nature, according to Crisil, an S&P Global company. A favorable monsoon season, low crude oil prices and reduced interest rates will support Indian growth; however, downside risks are on the horizon. The direct and indirect impacts of tariffs alongside declining growth in trade destinations will test India’s economic resilience.
India’s macroeconomic growth returns to pre-pandemic trend
The Indian economic growth outlook marks a return to a pre-pandemic trend. The economy in India grew 6.6% annually in the decade preceding calendar year 2020. This was followed by above-average growth of 8.8% between fiscal years 2022 and 2024, according to the National Statistics Office, driven by a low base effect and investment-led stimulus from the government. Rising interest rates, fueled by high inflation in India and normalized fiscal spending, led to a moderation in economic growth.
For fiscal 2026, S&P Global’s HSBC Purchasing Managers’ Index for India shows sustained expansion in both manufacturing and services, cementing India’s pole position among major economies.
How will the interplay of domestic and global developments influence the Indian economic growth outlook?
The Indian economic outlook for fiscal 2026 and beyond will be influenced by global tariff shocks and how domestic buffers and policy levers can be shaped to provide a cushion.
Impact of global developments on Indian economy likely to increase
Comparing Indian economic growth performance with that of advanced economies shows that while past external shocks have caused short-term challenges, they have not derailed long-term growth. Importantly, India has enhanced its economic growth advantage over developed countries by pursuing reforms, infrastructure development and process improvements.
However, while domestic factors largely drive the Indian economy, its exposure to advanced economies through trade and capital flows is increasing its short-term vulnerability to global economic disruptions. As exports and financial flows grow as a percentage of India’s GDP, so will the impact of international factors. For fiscal 2025, India's exports accounted for 21.2% of its GDP, while financial flows were 28.5%. For fiscal 2002, these numbers were 12.6% and 8.9%, respectively.
The significant shift in the global trade landscape in fiscal 2026 will test India’s economic resilience, particularly due to the direct and indirect effects of imposed tariffs.
How will the pending India-US trade agreement and US economic slowdown impact India’s exports?
The impact on exports will become clear only after a new India-US trade agreement is completed (pending at time of writing), both in terms of the tariff rate on India and the relative competitive advantage or disadvantage this could give the country compared with regional peers such as Vietnam, Thailand, South Korea and Japan, which have already secured agreements. As things stand, US tariffs will make Indian goods more expensive in the US market.
The second channel of direct impact stems from the outlook for the US economy. According to S&P Global Ratings, US growth is expected to slow to 1.7% in calendar year 2025, from 2.8% in calendar year 2024. Consequently, the demand for Indian goods exports to the US, which accounts for nearly 20% of India’s total goods exports, is likely to take a hit, affecting Indian economic growth.
How will collateral impacts such as global slowdowns, cheap imports and prolonged uncertainty affect the Indian economic outlook?
Although indirect transmission channels are outside of India’s control, managing their impact on the Indian economy will require suitable interventions in the domestic policy landscape.
1. Slowdown in key trade destinations
The eurozone, which accounts for 17.3% of India’s exports, is also facing growth challenges. While India’s direct goods export exposure to China is only 3.3%, a wider global slowdown would likely weigh on India’s overall export performance.
2. Overcapacity and overflow of low-cost imports
The ongoing trade tensions between Washington and Beijing may exacerbate China's concerns regarding overcapacity and deflation, leading it to redirect surplus supply to other markets, such as India. Given that China accounts for 15% of India's goods imports, this shift would pose challenges for domestic manufacturers. Safeguard duties on specific imports suggest the risk is already materializing.
3. Prolonged uncertainty
Persistent uncertainty is delaying private investment decisions and causing volatility in capital flows, financial markets and currency exchange rates. This trend is expected to continue as the tariff landscape evolves.
Luck, domestic buffers and policy support to drive Indian economic growth in FY 2026
The monsoon season and crude oil prices have been favorable in 2025. Abundant rainfall is expected to improve agricultural output and help maintain momentum in the rural economy, keeping food inflation in check.
As inflation softens, this should support urban consumption, which has yet to show signs of a decisive lift. While consumption in rural areas continues to exhibit robust growth, urban consumption is comparatively subdued. The income tax cuts announced in the budget, effective this fiscal year, should bolster this. The proposed goods and services tax rationalization could help bring down inflation and support private consumption. A sharp drop in food inflation would also improve the discretionary spending of lower-income groups in urban and rural areas.
Essential items such as food and fuel account for a larger share of the consumption basket for lower-income households. Crisil estimates from June 2025 show that the lowest-income 20% of the population faces lower headline inflation than the highest-income 20% in urban and rural areas. For instance, in the first quarter of fiscal 2026, the lowest-income 20% of the urban population faced 2.4% inflation, while the highest-income 20% faced 3.1% inflation. There are similar trends in rural consumption.
According to Crisil, crude oil prices are projected to average $65-$70 per barrel in fiscal 2026, compared with $78.8 per barrel in fiscal 2025. Lower crude oil prices contribute to reduced inflation and a smaller current account deficit (CAD), supporting the economy in India. According to the Ministry of Finance’s Economic Survey for 2017–2018, every $10-per-barrel increase in oil price reduces GDP growth by about 0.2-0.3 percentage point and worsens the deficit by about $9 billion-$10 billion.
Indian economic growth buffers
Rising services exports provide a cushion: The composition of India’s exports provides some resilience. Services exports, which account for 47% of the country’s exports, according to the Indian government, are less vulnerable to global trade fluctuations than goods exports.
The World Trade Organization shows the global goods trade will contract 0.2% and the services trade will grow 4.0% in calendar year 2025. While services exports are expected to slow down, they will do so more gradually than goods exports.
Healthy external markers reduce dependence on capital flows: External markers, such as the CAD and foreign exchange reserves, remain healthy, providing strength at a time when even financing a low CAD can be challenging due to volatile capital flows. Crisil expects India’s CAD to remain in a safe zone of about 1% of GDP in fiscal 2026, while foreign exchange reserves were at $702.8 billion in June 2025, enough to support a year of imports.
In fiscal 2025, despite the CAD declining to 0.6% of GDP, financial flows were inadequate as net foreign portfolio investments and net foreign direct investment inflows fell. However, the rise in net external commercial borrowings provided some support. In fiscal 2026, foreign portfolio investment flows are expected to remain volatile, given global uncertainties.
Two key cyclical policy drivers can be leveraged: Monetary and fiscal policy are key policy levers that provide cyclical support for growth. Fiscal policy in India has limited room to aggressively support growth due to the need to bring down the deficit.
Fiscal policy in India remains focused on capital expenditure and infrastructure
The fiscal deficit for India’s central government spiked to 9.2% of GDP in the pandemic-hit fiscal 2021 but was reduced to 4.8% of GDP by fiscal 2025. The target for fiscal 2026 is to further reduce the deficit to 4.4% of GDP.
Reducing the deficit can limit the government's ability to invest in capital expenditure, which has a significant multiplier effect and is crucial for long-term economic growth. Despite coming down, the growth of central government capex is still budgeted at a respectable 10.1% for fiscal 2026.
Unlike in fiscal 2025, the Indian government has prioritized capex since the outset of fiscal 2026. Government capex in April–May 2025 was 2.21 trillion rupees, up 54.1% year over year from 1.43 trillion rupees. Capex for 16 major states was up 15.5%, according to state government budgets.
India’s parliamentary elections caused capex to slow in the first half of fiscal 2025, with the government unable to meet its original budget targets. Although the government has limited fiscal space, as it needs to bring down its fiscal deficit, capex is budgeted to grow a bit faster than nominal GDP in fiscal 2026. This is important in the wake of likely postponement of investment decisions by the corporate sector amid heightened global uncertainties.
If tariffs affect activity in labor-intensive sectors such as textiles and jewelry, the government might need to introduce fiscal policy to support them.
Monetary space opens up
Monetary policy in India is supportive, driven by a sharper-than-expected decline in inflation, which has granted the Reserve Bank of India’s Monetary Policy Committee room for one more rate cut in the current cycle, beyond the 100-basis-point cut already pursued. Although, according to Crisil estimates, headline inflation will likely drop to the Reserve Bank of India’s target of 4% in fiscal 2026, the Indian inflation trend thus far suggests it could fall further.
Looking forward
Growth rates in India must increase for the country to attain developed status by 2047. The government and other public stakeholders must balance enhancing domestic growth drivers, attracting foreign capital and improving external market access. Accelerating the deregulatory measures pledged by the government in the budget is essential to ease business transactions. This will help unlock India's growth potential and enhance its appeal as an investment destination. In this uncertain environment, foreign trade agreements offer a strategic opportunity to boost exports. The agreements can enhance trade stability by reducing tariff barriers and establishing predictable trade policies.
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This article was authored by a cross-section of representatives from S&P Global and in certain circumstances external guest authors. The views expressed are those of the authors and do not necessarily reflect the views or positions of any entities they represent and are not necessarily reflected in the products and services those entities offer. This research is a publication of S&P Global and does not comment on current or future credit ratings or credit rating methodologies.
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