India’s growth story defies global headwinds

India’s economy has demonstrated remarkable resilience. This has occurred despite global headwinds and trade policy uncertainties, thanks to timely diversification of exports and the government’s swift efforts to finalise trade agreements with other trade blocs.

Encouraged by the half-yearly real GDP growth of 8%, coupled with the momentum in private consumption following GST reforms across rural and urban areas during the festival season, and supported by the government’s enhanced capital expenditure as planned, which is expected to further accelerate in the remaining half of the year—India’s economy has demonstrated remarkable resilience.

This has occurred despite global headwinds and trade policy uncertainties, thanks to timely diversification of exports and the government’s swift efforts to finalise trade agreements with other trade blocs. These factors, along with a reasonably positive export performance, have led several global and domestic agencies to revise India’s GDP growth outlook upwards.

For FY 2026-27, global agencies such as the World Bank have projected GDP growth of around 6.5%, while the UN forecasts 6.7%. Moody’s expects growth of 6.5%, and the IMF and OECD also foresee strong growth in the range of 6.2% to 6.6%.

These estimates take into account ongoing US Tariffs. However, India's resilient private consumption and sustained public investment continue to support the growth outlook. It is noteworthy that India is expected to remain the world’s fastest-growing large economy.

Against this background, Ministry of Statistics and Programme Implementation (MoSPI) recently released First Advance Estimates for 2025-26, projecting a strong real GDP growth of 7.4%, up from 6.5% in 2024-25. This growth is expected to be driven by services, manufacturing, construction, with a nominal GDP growth estimated at around 8%, pushing the economy closer to $4 trillion mark despite global pressures.

According to the estimates, buoyant services sector growth has led the Indian economy to register Real GVA growth of 7.3% in FY 2025-26. As per the First Advance Estimates of GVA at basic prices by economic activity (at 2012–13 prices), financial, real estate and professional services are projected to grow at 9.1%, compared to 7.2% in FY 2024–25.

The primary sector, comprising agriculture and mining, is estimated to grow at a lower rate of 2.7%, down from 4.4% last year. The secondary sector such as manufacturing, electricity, gas and construction is projected to grow at 6.6% in 2025–26, compared to 6.1% in 2024–25. Overall, GVA at basic prices is estimated at 7.3% for the current year, up from 6.4% last year, indicating that the primary sector is currently weighing on overall growth.

More specifically, agriculture is estimated to grow at 3.1% compared to 4.6% last year, while mining and quarrying are projected to contract by 0.7% compared to 2.7% growth earlier. Manufacturing growth is expected to accelerate from 4.5% last year to 7% this year. Electricity, gas, water supply and other utility services are projected to grow at a slower pace of 2.1%, down from 5.9% last year.

Construction is also estimated to slow to 7% from 9.4% last year. In contrast, trade, hotels, transport, communication and broadcasting-related services are likely to grow at 7.5%, up from 6.1% in FY 2024–25. Financial, real estate and professional services are expected to record 9.9% growth, compared to 7.2% last year, while public administration, defence and other services are projected to grow at 9.9%, up from 8.9%.

The current growth estimates reflect resilient domestic demand and a manufacturing rebound despite global uncertainties. These are only First Advance Estimates and may be revised upwards if the present momentum of the Indian economy continues.

In the Union Budget 2025–26, nominal GDP growth was assumed at 10.1%. However, current estimates place it closer to 8%, mainly due to persistently weak inflation, which has narrowed the real–nominal growth gap.

Most budget projections such as tax collections and fiscal deficit were based on a nominal GDP growth of 10.1% for FY 2026. However, since the actual size of the economy in 2024–25 turned out larger than earlier estimated, these changes are unlikely to significantly disrupt overall budget arithmetic.

A new World Bank report on India, released on February 28, 2025, notes that India will need to grow at an average of 7.8% over the next 22 years to achieve its aspiration of becoming a high-income country by 2047.

According to the report’s co-authors, Emilia Skrok and Rangeet Ghosh, India can leverage its demographic dividend by investing in human capital, creating enabling conditions for more and better jobs, and raising female labour force participation from 35.6% to 50% by 2047.

The report outlines four major recommendations:

1. Increasing investment:

Both private and public investment must rise, with the real investment rate increasing from 33.5% of GDP to 40% by 2035. Large-scale fresh investments, both domestic amd foreign, are critical as they have strong multiplier effects that can propel the Indian economy onto a faster growth trajectory.

Despite multiple policy enablers at both central and state levels, private sector investment momentum remains subdued and needs to pick up. Additionally, the share of manufacturing in GDP must expand towards the 25% target at the earliest.

2. Creating more and better jobs:

India’s overall labour participation rate remains low at 56.4%, compared to Vietnam (73%) and the Philippines (around 60%). With AI increasingly automating routine tasks, the absorption of skilled workers will depend on reskilling and upskilling for specialised, technology-driven roles.

The report recommends incentivising private investment in job-rich sectors such as agro-processing, manufacturing, hospitality, transportation and the care economy. This requires targeted strategies for labour-intensive sectors, a larger skilled workforce, better access to finance and an innovation-driven ecosystem.

The government has already introduced some employment-focused schemes in recent budgets, but sustained emphasis is required.

3. Promoting structural transformation, trade participation and technology adoption:

According to the report, reallocating land, labour and capital towards more productive sectors—especially manufacturing and services—can significantly improve productivity, as agriculture still employs around 45% of the workforce.

Strengthening infrastructure, adopting modern technology, streamlining labour market regulations and reducing compliance burdens will further enhance productivity and competitiveness. Productivity-led manufacturing sector with qualitative improvements will enable India to export more competitively and withstand global market volatility.

4. Enabling states to grow faster and together:

The report highlights the need for next-generation reforms such as improving the business environment and deeper participation in global value chains. The Centre can facilitate this through incentive-driven federal programmes.

Capacity-building and targeted incentives will help low-income states improve public expenditure efficiency and catch up with leading states. Initiatives such as long-term interest-free loans to states and the Urban Challenge Fund already aim to bridge these gaps, but further support is recommended.

India has so far performed well despite global uncertainties by maintaining high capital expenditure, expanding infrastructure, and implementing schemes like PLI across 14 sectors to position itself as a global manufacturing hub.

Opening up the defence sector, allowing private participation in nuclear power, launching the semiconductor mission, providing tax relief, simplifying GST, implementing labour codes, promoting Digital India, strengthening digital public infrastructure, supporting startups and fintech, advancing AI and data centres, and accelerating the green energy transition are all positive steps.

Alongside proactive international trade engagement, these measures have helped Indian exporters maintain positive growth even in key markets like the US. With a strong domestic market, a favourable demographic profile and prudent fiscal management—evident in the steady reduction of the fiscal deficit—India has the capacity to undertake bold reforms and sustain high growth. The upcoming Union Budget is expected to provide a clear roadmap for achieving the vision of Viksit Bharat by 2047.

(The author is former Chairman & Managing Director of Indian Overseas Bank)