India’s economic growth is expected to remain strong in the September quarter of FY27, with the Finance Ministry estimating a 7.3 per cent expansion, following
the 7.8 per cent growth recorded in the June quarter. However, the ministry has cautioned that the economy faces a challenging external environment, with geopolitical tensions, trade disruptions and supply-chain risks clouding the outlook. In its latest Monthly Economic Review released on Thursday, the Finance Ministry said economic activity remained resilient in the opening months of the second quarter. At the same time, it stressed that India would need to sustain its policy momentum and strengthen its economic resilience rather than rely on the strong performance seen after the Covid-19 pandemic. “Growth momentum has extended into Q2 FY27, though at a more measured pace. Geopolitical and geoeconomic uncertainty mean that India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter. That is the challenge for policymakers,” the ministry said. The ministry pointed to several high-frequency indicators that suggest economic activity continued at a healthy pace during the early part of Q2 FY27. Agriculture remains an important support, with monsoon conditions turning out to be more favourable than previously expected. Kharif sowing has remained close to last year's levels across several crops, which could support farm output as well as rural consumption. “Monsoon conditions have been more favourable than earlier anticipated, with kharif sowing close to last year's levels across several crops. This supports the outlook for agricultural output and rural demand, although rabi prospects will require monitoring,” the report said. Geopolitical Tensions Pose Fresh Economic Risks Despite the positive domestic indicators, the ministry stressed several external risks that could affect India's growth trajectory. Renewed geopolitical tensions and the increasing use of supply chains as strategic tools could create disruptions in global trade and put pressure on energy prices. The report noted that volatility in energy costs, tighter global financial conditions and interruptions to trade routes could weigh on economic activity. "Interest rates in the developed world are rising sharply. It will spill over into domestic bond yields as well. Apart from that, it means cross border capital flows will slow as higher interest rates will persuade many investors to stay invested in domestic markets amidst pervasive and rising global uncertainty." The ministry said maintaining macroeconomic stability and improving the economy's ability to withstand external shocks would be important for sustaining growth. "Sustaining growth will therefore require preserving macroeconomic stability and strengthening economic resilience,” it added. Inflation Risks Could Weigh On Growth The government also flagged the possibility of supply-side inflation affecting economic growth. Climate-related risks, geopolitical developments and monetary conditions could combine to create renewed price pressures. “A strong El Niño event could pose risks to the upcoming Rabi crop through heat stress and reduced soil moisture, although a positive Indian Ocean Dipole may partially offset these effects. Geopolitical tensions and elevated crude oil prices could also add to imported inflation pressures, particularly amid the U.S. Federal Reserve’s 25 bps rate hike in September,” it said. The report also expects festive-season demand and higher input costs to create some short-term inflationary pressure. However, it said government measures aimed at managing supplies and markets could help moderate these risks. “Meanwhile, festive demand and higher input costs could add some near-term pressure to prices. However, proactive supply-side and market measures by the Government could help contain these upside risks and provide a cushion against temporary price pressures,” it added. India’s Exports Offer A Bright Spot India's external sector continues to provide some support to the broader economic outlook. The Finance Ministry noted that goods and services exports have remained robust, with the country's export value nearing $400 billion during the first five months of FY27 at the current pace. Quoting the robust goods and services exports figures, the report said at the current run rate of nearly $400 billion in the first five months of the year, India’s overall export value for the full financial year could approach a trillion US dollars. “That is a very strong confirmation that India’s trade agreements are providing impetus to India’s exports. It can only get better from here, with more trade agreements on the anvil,” it said. In August 2026, the services trade surplus offset 65 per cent of the merchandise trade deficit, helping reduce the country's overall trade deficit. Investment Outlook Remains Cautious The Finance Ministry also highlighted the need for consistent policymaking and stronger governance to maintain investor confidence. The report recommended sustained high-quality, consistent and reasonably swift decision-making to reassure investors. “More importantly, India must work on ensuring that the economy is more competition-friendly rather than business-friendly. Only a competitive economy will become a successful, innovative, and manufacturing economy. Improved governance and enhanced state capacity at all levels of the government hold the key to a competitive Indian economy.” While investor interest in India has not disappeared, the ministry said global and bilateral uncertainties are making investors more cautious. Trade relations with the US, tariff-related pressures, crude oil prices and developments in artificial intelligence were identified among the factors influencing investor sentiment. “For now, investor interest in India is not low but cautious. Near-term uncertainties pertaining to the state of the trade relationship with the United States, tariff pressures, uncertainty with respect to crude oil prices and supply and the absence of an India-angle to the AI-related global developments cast a shadow on India as an attractive investment destination. Over time, as some of these clouds inevitably dissipate, India’s intrinsic growth potential will earn the attention it deserves from investors,” it said.
