The Ministry of Statistics and Programme Implementation (MoSPI) released the provisional estimates for FY 2025-26 hours after the RBI’s Monetary Policy Committee (MPC) unanimously declared a neutral stance. The GDP numbers offer a positive outlook. Exceeding the IMF’s projection of 7.3 percent and MOSPI’s earlier estimate of 7.4 percent, real growth is estimated at 7.7 percent. This is significantly higher than projections for other emerging market and developing economies. In the face of persistent trade uncertainty and a massive supply shock, this signals robust growth momentum. But how long can India weather external shocks?
What appears to be a contradiction is, in fact, a matter of timing. MoSPI is measuring an economy that has already delivered, while the MPC is guarding against shocks that are still unfolding. FY 2025-26 ended with strong domestic momentum, but monetary policy is being set for a year in which energy prices, shipping costs, capital flows, and the monsoon could all move against India at once. That is why the same week produced both optimism and caution.
Both GDP and private consumption grew at 7.7 percent; investment climbed sharply by 8.2 percent, whereas government consumption remained subdued.
Looking at the Numbers
Both GDP and private consumption grew at 7.7 percent; investment climbed sharply by 8.2 percent, whereas government consumption remained subdued. On the external front, no major disruptions are observed, except a minor widening of the current account deficit — from around US$95 billion to US$120 billion. What really matters here is the consolidation of investment. The GFCF component is largely dominated by private investment — about three-quarters of total investment comes from the private sector. The continued flow of public capex has had a crowding-in effect on private investment, which seems to have finally materialised after almost a decade of industrial production incentives. This shift from consumption-driven to investment-heavy growth should be further catalysed through business-enabling policies.
Figure 1: Private and Public Investment Co-movement
Source: MoSPI
However, the investment boom is nuanced. While private investment accounts for roughly three-fourths of fixed capital formation, the latest institutional data shows that the acceleration in 2023-24 was led far more by the public sector than by private corporations. Public GFCF rose sharply, while private non-financial corporate investment was relatively muted. This is crucial because a public-capex-led cycle can crowd in private investment, but cannot indefinitely substitute for it. Going forward, the test is whether stronger capacity utilisation, bank credit, and manufacturing confidence can turn public infrastructure spending into a durable private capex cycle.
Figure 2: Growth in GDP Components (Percent)
Source: MoSPI
On the supply side, growth was driven by the usual suspects. Trade, hotels, transport, communication, financial, IT, and real estate services all grew at over 10 percent. Services dominance has been the sustained pattern of Indian growth. What is slowly emerging is manufacturing momentum. Growing at 10.7 percent, manufacturing now accounts for 16 percent of GVA, while the secondary sector as a whole contributes more than a quarter of total GVA. This is reflected in the steady rise in merchandise exports. Agriculture and mining have been a drag on this year’s growth, potentially due to slower rice and wheat production. On the whole, this paints a positive picture. Owing to strong domestic demand and investment momentum, India has staved off the worst of the global slowdown. But how long is that feasible as external sector pressures pile up and producers are exposed to the turbulence of hyper-globalisation?
Figure 3: Sectoral GVA Growth (Percent)
Source: MoSPI
External Sector Volatility
The rupee’s fall began well before the Hormuz crisis showed up at the RBI’s doorstep. Since the onset of the blockade, the rupee has lost 4.9 percent of its value while India has lost US$46 billion in forex reserves. But this had been the trend since the announcement of the Liberation Day tariffs in April 2025. The rupee has depreciated by 11.5 percent since then, driven by trade uncertainty, which shook investor confidence and triggered a spell of capital flight. The Hormuz disruption accelerated matters further, seeping into India’s import bill. Trade uncertainty, coupled with a wider current account deficit, set off a speculative spree in the currency market, triggering a form of the second-generation currency crisis — a self-fulfilling crisis in which market sentiment and speculative investor expectations drive the currency down.
However, this is not yet a currency crisis in the conventional sense. India still holds reserves worth US$682 billion (11 months of import cover), capital controls are limited but not absent, and the rupee’s fall has been gradual rather than disorderly. The concern is subtler: once markets begin pricing in a persistent oil shock, wider import payments, and weaker portfolio flows together, the exchange rate itself becomes part of the inflation channel. Depreciation raises the rupee cost of imports, and higher import costs worsen inflation expectations, which can invite further pressure on the currency.
A fuel shock passes through to every sector — through fertilisers in agriculture, through fuel and input costs in manufacturing, and through operating expenses across the services sector.
Beyond the currency crisis, things at home are heating up as a fuel shock works its way through the commodity network. A fuel shock passes through to every sector — through fertilisers in agriculture, through fuel and input costs in manufacturing, and through operating expenses across the services sector. If energy prices remain elevated due to disruption in the Strait, inflation could rise above 5 percent. Imported inflation from a weaker rupee further exacerbates the situation. Letting the rupee find its level and deploying reserves to finance imports is the prudent option here. Although domestic prices will soar, the current account will adjust to relieve pressure on foreign reserves.
India remains heavily reliant on imported crude. The energy intensity of growth makes oil different from most other imported inputs. A spike in crude prices does not stay confined to the petroleum account, even in a services-heavy economy. The pass-through may be slower than in an industry-heavy one, but it is still pervasive. The problem is therefore not only the price of oil, but the economy-wide cost of keeping production and consumption moving.
Quick Fixes Won’t Do
This is not an ideal solution, since domestic inflation immediately hurts consumption and growth. Faced with this predicament, the RBI decided to maintain a neutral stance — raising interest rates to attract foreign capital would also dampen domestic consumption and investment. In the face of a supply shock, depressing demand is warranted only when inflation is at concerning levels. CPI at 3.48 percent does not merit a rate hike. A rate hike will become necessary if and when expensive inputs coupled with imported inflation push CPI beyond the RBI’s tolerance range. That might cost India its GDP growth in the short run. For now, the government has exempted taxes on G-Sec bonds and eased restrictions on exit from the market. This serves as an alternative mechanism for drawing in foreign capital that circumvents the inflation-growth trade-off. This should deepen dollar reserves over the medium term.
As India rode the hyper-globalisation wave, its economy became further integrated into global production and finance chains.
Besides monetary policy, fiscal austerity can provide some relief. By curtailing the revenue deficit and maintaining capex, the government can pull down aggregate demand, easing inflationary pressures. While fiscal contraction will also dampen output, price stabilisation can maintain or even strengthen domestic consumption. The differential between capex and revenue multipliers can finance long-run growth and crowd in further private investment. Despite a short-run output contraction, it can fuel private corporate investment through lower interest rates in the medium run. Both fiscal and monetary policy measures must keep real interest rates at relatively low levels to ensure investment stability in the medium to long run.
As the discussion suggests, there are no quick fixes to the impending crisis. As India rode the hyper-globalisation wave, its economy became further integrated into global production and finance chains. A crisis anywhere is a crisis at home. Trade diversification across products and markets would address both problems — trade uncertainty and global shocks. Diversified export markets would prevent tariff imposition by one country from destabilising the entire external sector. Similarly, diversified energy imports would prevent a regional shock from skyrocketing the import bill. Responding to a supply shock with a demand measure that hurts output is poor economics. Rather, sustaining growth should be the driving objective. As investors often equate growth with security, a stronger GDP will also forestall an ‘animal spirits’ currency crisis. The task now is not to choose between defending the rupee and defending growth — it is to build an economy less vulnerable to external bottlenecks.
Arya Roy Bardhan is a Junior Fellow with the Centre for New Economic Diplomacy at the Observer Research Foundation.
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