The Indian economy is set to grow strongly in the FY27 amid geopolitical risks, high crude oil prices, and weak global trade. As per EY’s report, real GDP growth would range from 7% to 7.2% driven by strong domestic demand and government capex. The nominal GDP growth would be 12.5%-13%. While industrial production is seen to show signs of strength, some high-frequency indicators have become less favorable. Inflation is one of the biggest risks to the economic outlook, especially wholesale inflation.
Growth is Driven by Domestic Demand and Capex
Domestic demand and ongoing government investments in infrastructure and other capital projects will continue to play a crucial role as growth factors according to EY.
The government capex saw a sharp recovery in Q1 of FY27, up 23.7% YoY, reversing a -23.3% fall in the last quarter of FY26. The fiscal deficit was 18.2% of the budget for the year showing that the government went ahead with its capital investment efforts amid limited fiscal pressure.
Positive Performance of India’s Industrial Activity
India experienced a strong improvement in its industrial activity in June 2026. As per EY, the IIP rose sharply to 7.3%, reaching its peak in 23 months. The average industrial activity in Q1 of FY27 stood at 5.7%, which was the best growth rate in 8 quarters.
The manufacturing production increased by 7.8% with electricity, motor vehicles, textiles and food products performing well.
On the other hand, purchasing managers’ index indicated a slowdown. The manufacturing PMI dipped to 53.5 in July from 54.2 in June, while the services PMI decreased to 53.3 from 57.4. Both stayed above the 50-level showing continued growth.
Risk of Inflation Persisting
Inflation can be a risk to growth. The consumer price inflation was 4.4% in July, while the wholesale price inflation was 9.8%.
Some of the reasons for an increase in WPI inflation were mineral oils, food articles, metals, chemicals, and fuels. According to EY, the rise in wholesale inflation can lead to nominal GDP growth exceeding government expectations of 10.04%.
External Risks Persist in Exports
Energy cost increases and low global demand pose a challenge for India. EY mentioned that according to OECD estimates, the current account deficit is expected to reach 1.9% of GDP in FY27.
Some of the suggestions mentioned in the report include import substitution and increasing domestic value additions. Focusing on import substitution and export promotion on 1,272 goods may result in substitution of imports valued at $189 billion.
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