- Energy shocks, US trade uncertainty and AI disruption pose external risks.
- Stable jobs and solid real income growth are sustaining consumer spending.
- Exports are growing at their fastest pace in four years, with shipments to the US rebounding.
- Domestic investors continue supporting markets despite weak foreign capital inflows.
- Anchored inflation expectations and fiscal discipline underpin economic resilience.
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India’s strong growth narrative faces several challenges, including energy import price and supply affected by the war in Iran, never-ending trade and tariff related uncertainties stemming from the US, and AI’s shadow on its IT services industry. Additionally, weather-related volatility has threatened agriculture output, net FDI has been underwhelming, and the combination of a weak rupee and unperforming stock market has provided foreign investors negative returns, leading to portfolio outflows.
Looking at so many negative factors, the tendency would have been to mark down India’s economic forecasts considerably a year ago. But that would have been missing the full picture. The Indian economy has shown resilience over the past couple of years, which is showing up in its favourable spreads and declining risk premium.
India’s consumers have been spending heavily on a wide range of areas, from autos to domestic tourism, online shopping to restaurants, clothes to consumer electronics. This has been helped by a stable jobs market and steady real income growth. The robust spending in turn has boosted company earnings in several segments. Higher energy prices and external uncertainties are not helpful developments, causing a K-shaped dynamic, but net momentum is strong. Weak foreign inflows have not deterred domestic retail and institutional participation in the capital markets.
Trade related news may be dominated by trade wars, but demand for made-in-India goods has been robust. Exports growth is the strongest in four years. Shipments to the US, after a tariff shock driven decline last year, have rebounded in recent months.
India’s trade dynamism is striking as its exporters are not part of the AI boom driven demand cycle that is benefitting North and South-East Asia. Taiwan and Vietnam will likely end 2026 with higher GDP growth outturn than India, but at close to 8% for the calendar year 2026, India’s overall performance would also be quite impressive.
One strong factor underpinning the domestic momentum has been well-anchored inflation expectations and sustained fiscal discipline. Even as imported prices and global interest rates have risen, Indians don’t expect runaway inflation or a liquidity squeeze. There is no downplaying of the plethora of macro risks at play, but India’s consumers, firms, and policy makers are displaying admirable resolve to deal with them.
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