India cannot afford to take its growth performance for granted amid worsening geopolitical polarisation and needs to take sustained, high-quality and reasonably swift decisions to reassure investors, while making the economy more “competition-friendly” rather than merely “business-friendly”, the finance ministry said in its latest Monthly Economic Review on Thursday.
“Only a competitive economy will become a successful, innovative, and manufacturing economy. Improved governance and enhanced state capacity at all levels of the government hold the key to a competitive Indian economy,” the report said. The warning comes at a time when foreign investors have turned cautious on Indian equities, with foreign portfolio investors (FPIs) pulling out funds amid rising global bond yields, tariff pressures and the absence of a domestic AI play.
The report hoped that, over time, investors will come to appreciate the resilience and sustained high growth in India in the post-Covid years. “As some of these clouds inevitably dissipate, India’s intrinsic growth potential will earn the attention it deserves from investors,” the report said.
The finance ministry anticipates economic growth of 7.3 per cent in the September quarter of FY27, following a robust 7.8 per cent expansion in the June quarter. “Growth momentum has extended into Q2 FY27, though at a more measured pace. Geopolitical and geoeconomic uncertainty mean that India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter. That is the challenge for policymakers,” the report said.
The finance ministry said most high-frequency indicators point to continued economic activity in the early part of Q2. “Monsoon conditions have been more favourable than earlier anticipated, with kharif sowing close to last year’s levels across several crops. This supports the outlook for agricultural output and rural demand, although rabi prospects will require monitoring,” it added. However, it maintained that sustaining growth will require preserving macroeconomic stability and strengthening economic resilience. The report also warned that inflation arising from supply shocks will restrain economic growth. “Interest rates in developed world are rising sharply. It will spill over into domestic bond yields as well. Apart from that, it means crossborder capital flows will slow as higher interest rates will persuade many investors to stay invested in domestic markets amidst pervasive and rising global uncertainty,” it said.
The report underlined the upside inflation risks driven by compounding climate, geopolitical and monetary headwinds. “A strong El Niño event could pose risks to the upcoming Rabi crop through heat stress and reduced soil moisture, although a positive Indian Ocean Dipole (IOD) may partially offset these effects. Geopolitical tensions and elevated crude oil prices could also add to imported inflation pressures, particularly amid the U.S. Federal Reserve’s 25 bps rate hike in September,” it said.
However, it expects that the Reserve Bank of India’s recent open market operations to absorb excess system liquidity could help maintain balanced financial conditions and contain any undue demand-side overheating. “Meanwhile, festive demand and higher input costs could add some near-term pressure to prices. However, proactive supply-side and market measures by the Government could help contain these upside risks and provide a cushion against temporary price pressures,” it added.
Citing the robust goods and services export figures, the report said that, at the current run rate of nearly $400 billion in the first five months of the year, India’s overall export value for the full financial year could approach $1 trillion. “That is a very strong confirmation that India’s trade agreements are providing impetus to India’s exports. It can only get better from here, with more trade agreements on the anvil,” it said.
In August 2026, the services trade surplus offset 65 per cent of the merchandise trade deficit, thereby reducing the overall trade deficit.
The report said trade relations with the United States remain “unsettled” with the passage of the Graham Bill through Congress and its presidential assent. The bill empowers the president to impose tariffs of up to 100 per cent on countries that purchase Russian crude oil.
