India's economy continues to defy growth projections, recording a GDP expansion of 7.8% in the fourth quarter of fiscal year 2025-26, significantly surpassing all estimates. For the full fiscal year 2025-26, the economy grew at a robust 7.7%, retaining its position as the fastest-growing major economy. This growth demonstrates fundamental strength despite the quarter being partially affected by the US-Iran war.
Strong consumer spending and investment activity continued to support economic momentum. Key growth drivers included manufacturing, construction, and services, while private consumption and capital expenditure remained robust throughout FY26.
However, while the January-March quarter saw little direct impact from the war, the potential hit to growth from the Middle East crisis in the ongoing financial year cannot be ignored. Consequently, the Reserve Bank of India (RBI) has lowered its GDP growth forecast for FY 2026-27 to 6.6%, compared to the 6.9% projected in its April review.
GDP Data Beats Estimates
The latest GDP data is seen as a sign of India's underlying economic strength, particularly driven by domestic sector-led growth. Yuvika Singhal, Economist at QuantEco Research, notes notable resilience in India's Q4 FY26 GDP growth, which eased only marginally to 7.8% from an upwardly revised 8.0% in Q3 FY26. She explains that despite the moderation, economic activity remained largely insulated from the initial effects of the Middle East conflict, supported by a reduction in US tariff levels, sustained government-led capital expenditure, and residual benefits of GST rate rationalization.
Ranen Banerjee, Partner and Leader of Economic Advisory at PwC India, attributes the strong performance to manufacturing, trade, travel, and services. Private consumption growth above 7% and gross capital formation above 8% were healthy, driven by continued government capex push. DK Srivastava, Chief Policy Advisor at EY India, believes the 7.7% annual growth confirms India's impressive post-COVID recovery, preceded by real GDP growth rates of 7.2% and 7.1% in 2023-24 and 2024-25, respectively. Output performance measured by GVA growth in 2025-26 was even more impressive at 7.9%.
Sectors showing exceptionally high GVA growth include manufacturing at 10.7%, trade and transport at 11.0%, and financial and real estate at 10.4%. On the demand side, private final consumption expenditure and gross fixed capital formation grew robustly at 7.7% and 8.2%, respectively. However, the growth came largely from strong domestic demand, with the external sector under pressure. The contribution of net exports to overall growth is near zero, indicating that domestic factors dominate India's growth performance.
Why GDP Growth Momentum May Fall
While hailing the strong GDP data, economists caution that maintaining the current momentum in this financial year will be difficult as the full impact of the US-Iran war hits the economy. Experts believe the impressive growth performance will experience a short-term setback in 2026-27, driven largely by exogenous factors related to the West Asian crisis and supply bottlenecks affecting crude oil, gas, and fertilizers.
DK Srivastava notes that India's growth in 2026-27 will depend on a speedy normalization of global crude supply and prices. Even if growth clocks in the range of 6.5 to 6.6%, India would still be an impressive contributor to global growth. Ranen Banerjee points out that while Q4 seemed unimpacted, the effects of the Middle East conflict that began in March would likely appear from Q1 of FY27.
The downside risks and impacts of higher commodity prices are likely to manifest in higher inflation in coming quarters, as outlined by the RBI. This will have a sobering effect on household discretionary spending, putting pressure on private consumption and subsequently affecting private sector investments for capacity addition. The agricultural sector, which has contributed with healthy growth rates above 3% over recent years, faces downside risks from monsoon uncertainty. If realized, this could feed into inflation and cause further headwinds through rural consumption weakness. However, this risk is partially mitigated by healthy reservoir storage levels, which can compensate for some rainfall shortfall as long as distribution is not very skewed.
The adverse impact of the US-Iran conflict is likely to be reflected through pressure on producer margins, production adjustments across sectors, and pass-through of higher retail fuel prices with second-round inflationary effects on consumption. These risks are compounded by the IMD's projection of below-normal southwest monsoon, with adverse implications for food prices and rural demand. Yuvika Singhal notes that reflecting these risks, FY27 GDP growth expectations have been revised downward to 6.2%, while CPI inflation is projected to rise to 5.5% by QuantEco Research, based on global crude oil averaging $90-95 per barrel in FY27.
India's Resilience to Help Tide Over Situation?
Chief Economic Advisor V Anantha Nageswaran expressed confidence in India's growth trajectory, calling the ongoing conflict a temporary setback. He stated that macro stability measures and supply assurances will bring the economy back to a 7% plus growth track in FY28 or as soon as external conditions improve.
DK Srivastava highlights that the OECD has projected India's economic growth at 6.3% for 2026-27, more than double the projected global growth of 2.8% under a limited-time disruption scenario and 2.1% in a prolonged disruption scenario. Contextualizing India's growth at 6.3% against global growth of 2.1% to 2.8% underscores India's underlying resilience to exogenous shocks. He suggests that India should minimize the impact of global shocks affecting supplies and prices of critical commodities like crude oil, gas, and fertilizers by building strategic reserves.
As RBI Governor Sanjay Malhotra stated, the Indian economy entered this episode of global turbulence with much better fundamentals than in previous similar episodes. While confident to withstand these shocks with minimum pain, it is important to confront and address these challenges and take them as an opportunity to further enhance resilience.
