Resilient Domestic Consumption, Government Capital Spending and Improving Industrial Activity Expected to Support Economic Growth Despite Global Risks
New Delhi : India’s economic growth is expected to remain resilient in FY27 (2026-27), with real GDP growth projected in the range of 7–7.2 per cent, according to a recent report by EY.
The growth outlook is expected to be supported by strong domestic demand, sustained government spending on infrastructure and capital projects, improving industrial activity and supportive credit growth.
EY has estimated India’s nominal GDP growth at 12.5–13 per cent for FY27, while noting that the economy continues to face risks from geopolitical tensions, elevated crude oil prices and a weaker global trade environment.
Domestic Demand Remains a Key Growth Driver
According to EY, India’s relatively strong domestic demand is expected to provide an important cushion against external economic uncertainties.
While global trade conditions remain challenging, domestic consumption and investment are expected to continue supporting overall economic activity.
The government’s continued focus on infrastructure development and capital expenditure is also expected to generate demand across sectors and support private-sector economic activity.
The report suggests that the combination of domestic demand and public investment could help India maintain a relatively high growth rate through FY27.
Industrial Production Records Strong Expansion
The outlook has also been strengthened by a significant improvement in industrial production.
According to EY, the Index of Industrial Production (IIP) grew 7.3 per cent in June 2026, marking its fastest expansion in 23 months.
The strong IIP performance indicates increased industrial activity and provides a positive signal for the manufacturing and broader economic outlook.
However, EY cautioned that more recent high-frequency indicators suggest that the pace of expansion may be beginning to moderate.
Manufacturing and Services PMI Show Slower Expansion
India’s Purchasing Managers’ Index (PMI) data showed some moderation in business activity during July.
The manufacturing PMI declined to 53.5 in July from 54.2 in June.
The services sector saw a more pronounced slowdown, with the services PMI falling to 53.3 from 57.4.
Although both indices remained above the crucial 50-point mark, which indicates expansion, the decline suggests that the pace of expansion has moderated.
The divergence between the strong June industrial production numbers and softer July PMI readings will therefore remain an important indicator to watch during the coming months.
Bank Credit Growth Provides Support
Credit growth remains another positive factor for the Indian economy.
EY said gross bank credit growth accelerated to 18.6 per cent in June, representing its strongest pace in 25 months.
Strong credit expansion can support consumption, business investment and working-capital requirements, thereby contributing to broader economic activity.
The acceleration in bank lending therefore provides additional support to EY’s growth projection for FY27.
Government Capex Rebounds Sharply
Public investment continues to be one of the most important foundations of India’s economic growth strategy.
According to EY, government capital expenditure increased 23.7 per cent in the first quarter of FY27.
The sharp increase represents a significant turnaround from the 23.3 per cent contraction recorded in the previous quarter of FY26.
The renewed momentum in government capital spending is expected to support demand and strengthen India’s growth trajectory during the current financial year.
Infrastructure and other capital projects can generate activity across construction, manufacturing, transportation, engineering and related sectors while also improving the economy’s productive capacity over the longer term.
Fiscal Deficit at 18.2% of Annual Target
India’s fiscal deficit during the first quarter of FY27 stood at approximately 18.2 per cent of the full-year budget target.
EY expects the renewed pace of capital expenditure to continue supporting economic activity while the government manages its fiscal position.
A stronger-than-expected nominal GDP growth rate could also improve government revenues and provide additional fiscal flexibility.
Inflation Outlook Remains Important
Inflation continues to be an important factor influencing India’s broader economic outlook.
According to the report, consumer price inflation stood at 4.4 per cent in July, while wholesale price inflation (WPI) rose to 9.8 per cent.
The sharp increase in wholesale inflation was attributed to several components, including:
- Mineral oils
- Food products
- Metals
- Chemicals
- Fuel-related items
The significant gap between consumer and wholesale inflation highlights differing price pressures across the production and consumption sides of the economy.
Higher WPI Could Lift Nominal GDP Growth
EY said elevated wholesale price inflation could result in nominal GDP growth exceeding the 10.04 per cent assumption used in the government’s Budget calculations.
Nominal GDP combines real economic growth with changes in prices. Therefore, higher nominal growth can potentially result in stronger tax collections and other government revenues.
If revenue collections improve as a result of faster nominal GDP growth, the government could have greater room to sustain capital expenditure while remaining within its targeted fiscal-deficit framework.
Global Risks Could Affect Growth Outlook
Despite its positive growth forecast, EY highlighted several risks that could affect India’s economic performance.
These include:
Geopolitical Tensions
Ongoing geopolitical uncertainties could disrupt trade, investment flows and global supply chains.
Elevated Crude Oil Prices
Higher crude oil prices could increase India’s import bill and put pressure on domestic inflation and the external balance.
Weak Global Trade
A weaker global trade environment could affect India’s exports and manufacturing activity, particularly in sectors dependent on international demand.
However, EY expects India’s strong domestic economic base to provide resilience against these external pressures.
Key Economic Indicators
| Indicator | Latest Data / EY Projection |
|---|---|
| Real GDP Growth FY27 | 7–7.2% |
| Nominal GDP Growth FY27 | 12.5–13% |
| IIP Growth, June 2026 | 7.3% |
| Manufacturing PMI, July | 53.5 |
| Manufacturing PMI, June | 54.2 |
| Services PMI, July | 53.3 |
| Services PMI, June | 57.4 |
| Gross Bank Credit Growth, June | 18.6% |
| Government Capex Growth, Q1 FY27 | 23.7% |
| Fiscal Deficit, Q1 FY27 | 18.2% of annual target |
| Consumer Inflation, July | 4.4% |
| Wholesale Inflation, July | 9.8% |
| Budget Nominal GDP Assumption | 10.04% |
What Could Drive India’s Growth in FY27?
EY’s outlook points to several factors that could sustain India’s growth during FY27.
Strong Domestic Demand:
Domestic consumption remains a major source of economic resilience and can reduce the economy’s dependence on external demand.
Government Capital Expenditure:
The sharp recovery in public capex is expected to generate demand and support infrastructure-related sectors.
Improving Industrial Activity:
The 7.3 per cent IIP growth in June indicates strong industrial momentum, although subsequent PMI data suggest some moderation.
Strong Credit Growth:
The acceleration in bank credit growth could support businesses, consumers and investment.
Higher Nominal Growth:
If inflation and real growth combine to produce stronger nominal GDP growth, government revenue collections could benefit.
Challenges Ahead
While the overall outlook remains positive, the economy will need to navigate several challenges.
The moderation in both manufacturing and services PMI suggests that the strong pace of economic activity seen earlier may not continue uniformly.
At the same time, elevated wholesale inflation and international commodity prices could create additional cost pressures for businesses.
External risks, particularly geopolitical developments, crude oil prices and global trade conditions, could also influence India’s growth performance.
The key challenge for policymakers will therefore be to maintain the momentum of domestic demand and public investment while keeping inflation and fiscal risks under control.
Outlook
EY’s projection of 7–7.2 per cent real GDP growth for FY27 indicates that India is expected to remain among the world’s faster-growing major economies.
The combination of strong domestic demand, renewed government capital expenditure, improving industrial output and robust bank credit growth provides a supportive foundation for economic expansion.
At the same time, softer PMI readings suggest that policymakers and businesses will need to monitor the pace of activity closely.
Higher wholesale inflation could potentially push nominal GDP growth above the government’s budget assumption of 10.04 per cent, potentially strengthening tax and other revenue collections.
If this translates into stronger government revenues, it could provide additional room for continued infrastructure and capital spending without compromising the fiscal-deficit objective.
Conclusion
India’s economy is expected to remain resilient during FY27, with EY forecasting real GDP growth of 7–7.2 per cent and nominal GDP growth of 12.5–13 per cent.
Strong domestic demand and a renewed government capex push are likely to remain the principal engines of growth, while improving industrial production and faster bank credit growth provide additional support.
However, the moderation in manufacturing and services PMI readings, elevated wholesale inflation, geopolitical tensions, high crude oil prices and weaker global trade remain important risks.
Overall, EY’s assessment suggests that India’s domestic economic strength and public investment momentum could help the country sustain high growth despite a challenging global environment.
