New Delhi: India enters FY27 with one of the strongest macroeconomic foundations among major economies, but policymakers now face a fresh test from geopolitical uncertainty and climate risks. After posting a robust 7.7% real GDP growth in FY26, backed by resilient domestic demand and broad-based sectoral expansion, the economy is expected to moderate in the current fiscal as higher oil prices, supply disruptions and an uncertain monsoon weigh on activity. Even so, stronger nominal growth is expected to provide a crucial buffer for government finances, allowing New Delhi to maintain fiscal discipline despite mounting external pressures.
The latest assessment by EY India suggests that India’s growth story continues to be overwhelmingly driven by domestic consumption and investment rather than exports. Manufacturing expanded by 10.7% in FY26, while trade, transport and related services grew 11%, and financial and real estate services rose 10.4%. Private consumption increased 7.7%, while gross fixed capital formation advanced 8.2%, underlining sustained investment appetite despite global headwinds.
According to the EY Economy Watch: Monitoring India’s Macro-fiscal Performance, the FY26 performance capped an impressive post-pandemic recovery, but the immediate outlook has become more challenging. “The impressive real growth performance, however, is expected to experience a short-term setback, with real GDP growth projected to decline in FY27. This slowdown is likely to be driven largely by exogenous factors, particularly the West Asian crisis, leading to supply bottlenecks and price shocks affecting sectors such as crude oil, gas and fertilizers.”
Oil Risks Ease
The EY report argues that the biggest swing factor for FY27 will be the trajectory of global crude prices. The preliminary understanding reached between the US and Iran has already eased pressure on energy markets, with Brent crude averaging $76.6 a barrel between June 19 and June 25 compared with $92 during the first 18 days of June. If shipments through the Strait of Hormuz normalise quickly, the economy could regain momentum after an initial slowdown.
“India’s growth performance in FY27 might depend largely on a speedy normalization of global crude supply and prices. If global crude prices settle at relatively lower levels and shipments through the Strait of Hormuz normalize, we expect India’s real GDP growth to range between 6.6-6.8%,” it states.
The Reserve Bank of India has projected FY27 real GDP growth at 6.6%, assuming a prolonged West Asian conflict, while the OECD has pencilled in a lower 6.3%. The World Bank, however, expects India to grow 6.6% this fiscal before accelerating to 7.2% in FY28. Even under these more conservative estimates, India's expansion remains more than double projected global growth, highlighting the economy’s resilience amid external shocks.
Fiscal Buffer Holds
Perhaps the strongest signal emerging from the report is that higher nominal GDP growth is expected to contain fiscal pressures even as expenditure demands rise. The Centre successfully met its FY26 fiscal deficit target of 4.4% of GDP and revenue deficit target of 1.5%, despite gross tax revenue growth slowing to 6%. Total expenditure increased 5.4%, although capital expenditure growth moderated sharply to 1.6%.
The report observes, “Considering the recent geopolitical developments, if global crude prices settle at relatively lower levels and shipments through the Strait of Hormuz normalize, the positive momentum of India’s growth prospects is likely to be restored. Accordingly, we expect, in FY27, real GDP growth at 6.6-6.8%, CPI inflation at 4.5%, nominal GDP growth at 12.5%, GoI fiscal deficit at 4.4% and current account deficit at 1.5% of GDP.”
Inflation pressures nevertheless remain a concern. Consumer inflation edged up to 3.9% in May, while wholesale inflation accelerated sharply to 9.7% amid broad-based commodity price increases. The India Meteorological Department’s projection of a monsoon at only 90% of the long-period average, together with El Niño conditions, adds another layer of uncertainty through possible agricultural disruptions and food price pressures.
The broader macro picture, however, remains encouraging. Manufacturing activity strengthened, industrial production accelerated to a four-month high, bank credit continued expanding at 16%, and foreign direct investment (FDI) rebounded sharply in April. Although merchandise trade deficits remain elevated due to higher crude imports, resilient domestic demand continues to anchor economic activity. If energy markets stabilise and weather-related disruptions remain contained, India’s macroeconomic framework suggests that higher nominal growth could once again absorb external shocks while preserving fiscal credibility.
(Cover photo by Previn Samuel on Unsplash)