Trade tensions, financial market volatility key risks to India’s FY26 GDP growth: FinMin

India’s economy is expected to grow between 6.3 and 6.8 percent in FY26.

Geopolitical tensions, trade policy uncertainties, volatility in international commodity prices and financial market uncertainties pose considerable risks to India’s economic growth in the next fiscal, however the outlook for inflation remains benign, Ministry of Finance said on March 26.

In its Monthly Economic Review for February 2025, the ministry highlighted, “domestic private sector capital formation, focused on India’s solid fundamentals and economic prospects, will be an important driver of economic growth in FY26.”

The review pointed out that supportive fiscal measures, accommodative monetary policy, and the Union Budget’s focus on longer-term development reforms will strengthen India’s domestic economic resilience amidst significant global uncertainties. India’s economy is expected to grow between 6.3 and 6.8 percent in FY26.

On the inflation front, the finance ministry expects food prices to remain benign given estimates of agricultural production. Retail inflation eased to 3.6 percent in February 2025 as food prices eased.

The monthly economic review noted that India’s economic performance in the latter half of FY25 was supported by strong agricultural and service sector growth, alongside steady private consumption. The report highlighted that “real GDP and real GVA are estimated to have grown by 6.2 per cent in Q3 FY25. This reflected a rebound in economic activity from Q2 FY25, in which GDP growth was 5.6 per cent.” Growth in the agricultural sector was particularly strong at 4.6 percent in FY25, driven by robust kharif output and positive rabi prospects.

India’s fiscal management also remains on track, with the Union Budget 2025-26 laying out a prudent fiscal consolidation path. “The Union Budget 2025-26 announced a cautiously ambitious debt consolidation path that projects union government debt to decline by at least 5.1 percentage points over a six-year period from 2024-25 to 2030-31.” The government maintained a balance between fiscal consolidation, welfare, and growth, ensuring that “there is a close convergence of actual deficits, critical ratios, and essential expenditures with their budget estimates, indicating a sustained commitment to fiscal targets.”

Meanwhile, trade performance showed mixed trends. While India's total exports increased by 6.2 percent year-on-year during April-February FY25, merchandise exports recorded only marginal growth of 0.1 percent, weighed down by weaker petroleum product exports. However, services exports remained resilient, contributing to an overall trade surplus. “India’s exports have recorded softer growth thus far in FY25. However, a robust services trade surplus continues to offset the impact of lower growth in merchandise exports.”

Foreign investments saw a decline in net FDI due to increased repatriation and outbound investments. Nonetheless, the finance ministry remains optimistic about India’s capital market resilience, supported by steady fiscal management and policy reforms. “Despite the sell-off by FPIs and heightened global market turbulence, the Rupee continues to be amongst the least volatile currencies as compared to its peers.” India’s inclusion in the Bloomberg Emerging Market Local Currency Index is expected to further bolster foreign investment in debt markets.

Labour market indicators reflected stability, with the urban unemployment rate declining to 6.4 percent in Q3 FY25, accompanied by improvements in labour force participation and workforce expansion. Payroll data from EPFO indicated a net addition of 17.89 lakh members in January 2025, reflecting a continued increase in formal sector employment. The report stated that “various indices and surveys reveal positive sentiments towards hiring.”

Despite global uncertainties, the finance ministry reiterated that “strong macroeconomic fundamentals, sustained investment, and policy support would help India navigate external risks while maintaining a steady growth trajectory in the upcoming fiscal year.”