The Finance Ministry estimates 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, but warned that the country cannot take its performance for granted amid worsening geopolitical polarisation.
“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 ministry said on Thursday in its latest Monthly Economic Review.
Most high-frequency indicators point to continued economic activity in early 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 said.
However, it warned that external risks for the economy persist, with renewed geopolitical tensions and the growing weaponisation of supply chains, thus keeping energy prices volatile, tightening global financial conditions, and disrupting trade routes. “Sustaining growth will therefore require preserving macroeconomic stability and strengthening economic resilience,” it added.
The report also warned that inflation arising due to supply shocks will restrain economic growth. “Interest rates in the developed world are rising sharply. It [sic] will spill over into domestic bond yields as well. Apart from that, it means cross border capital flows will slow as higher interest rates will persuade many investors to stay invested in domestic markets amidst pervasive and rising global uncertainty.”
The report recommended sustained high-quality, consistent and reasonably swift decision-making to reassure investors. “More importantly, India must work on ensuring that the economy is more competition-friendly rather than business-friendly. 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 hoped over time, investors will come to appreciate the resilience and the sustenance of high growth in India in the post-pandemic years. “For now, investor interest in India is not low but cautious. Near-term uncertainties pertaining to the state of the trade relationship with the United States, tariff pressures, uncertainty with respect to crude oil prices and supply and the absence of an India-angle to the AI-related global developments cast a shadow on India as an attractive investment destination. Over time, as some of these clouds inevitably dissipate, India’s intrinsic growth potential will earn the attention it deserves from investors,” 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 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 the RBI’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.
Quoting the robust goods and services exports figures, the report said 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 a trillion US dollars. “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 in the US Congress and its presidential assent. The bill empowers President Donald Trump to impose tariffs of up to 100 per cent on countries that purchase Russian crude oil.
