Indian Economy Shows Resilience as GDP Expected to Grow 6.5% in FY26

India’s economy is projected to grow by 6.5% in the fiscal year 2025-26, despite facing global geopolitical tensions and trade policy uncertainties. S. Mahendra Dev, Chairman of the Economic Advisory Council to the Prime Minister, shared this optimistic outlook in a recent interview. He emphasized that domestic factors such as low inflation, favorable interest rates, and expectations of a good monsoon are contributing to this growth forecast, even as international challenges persist.
Resilience Amid Global Challenges
Dev highlighted the resilience of the Indian economy, noting that it remains the fastest-growing among large economies despite significant global headwinds. He pointed out that high-frequency indicators from April and May indicate robust domestic growth. The forecast of 6.5% GDP growth for FY26 is deemed feasible, supported by sound fiscal management and strong domestic momentum. While institutions like the International Monetary Fund (IMF) and the World Bank have lowered their growth forecasts for India to 6.2% and 6.3%, respectively, Dev remains confident due to rising public capital expenditure, healthy consumption patterns, and improving rural demand.
The recent disinflation trends also bolster this positive outlook. The Consumer Price Index (CPI) headline inflation in June was recorded at 2.10%, the lowest since January 2019, with food inflation at -1.06%. The Reserve Bank of India (RBI) has projected an average inflation rate of 3.7% for FY26, assuming a normal monsoon season. Dev noted that continued moderation in commodity prices, including crude oil, is expected, although vigilance regarding geopolitical uncertainties and tariff tensions is necessary.
Investment Dynamics and Foreign Direct Investment
Addressing concerns about net outward Foreign Direct Investment (FDI), Dev explained that while exits and repatriation are normal in a mature investment ecosystem, India continues to attract strong gross FDI inflows. These inflows rose by 14% in FY25, indicating that India remains an attractive destination for investment. He emphasized that enabling exits is crucial for attracting further investment.
Additionally, there has been a notable increase in non-resident deposits and external commercial borrowings in FY25 compared to the previous fiscal year. Dev pointed out that the government’s push for capital expenditure is likely to stimulate private investment, citing successful rural infrastructure projects, such as national highways and rural roads, that have boosted business activity. He acknowledged that while some firms may hesitate to expand capacity due to global uncertainties and overcapacity in countries like China, improving domestic demand could unlock further investment opportunities.
Future Prospects for Private Investment
Dev expressed optimism about the potential for increased private capital expenditure as domestic demand strengthens and global uncertainties diminish. He noted that many state governments are actively attracting both domestic and foreign private investment, and corporate balance sheets are in good shape, with the banking sector showing profitability. However, he cautioned that some firms are currently holding back on new investments, which could hinder growth.
To encourage further investment, Dev stressed the importance of improving the ease of doing business at the state level and providing clarity on trade tariffs. He believes that as domestic demand increases and global uncertainties are alleviated, private capital expenditure will likely rise. “India Inc has to make new investments instead of keeping the cash,” he stated, highlighting the need for proactive investment strategies to capitalize on the country’s growth potential.
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