India can't take its growth for granted, FinMin warns

India's economy entered the second quarter of FY27 in a strong position, but the Finance Ministry's Monthly Economic Review for September 2026 warns against taking its growth for granted. The review highlights India's resilience in a challenging global environment, with real GDP growth of 7.8% in Q1 and a nowcasting estimate of 7.3% growth for Q2.

Investor interest remains cautious, with near-term uncertainties such as the state of the trade relationship with the United States, tariff pressures, crude oil price uncertainty, and the lack of an India angle in global AI developments casting a shadow on India as an investment destination. However, the review expects these clouds to clear, allowing India's intrinsic growth potential to shine.

The recent sovereign rating upgrade from BBB+ to A- by Japan Credit Rating Agency in September 2026 underscores strengthening fundamentals. Most high-frequency indicators suggest continued activity in the early part of Q2, with resilient industrial activity backed by strong manufacturing GVA growth, rising industrial production, and higher bank credit to industry.

Favorable monsoon conditions and stable reservoir storage and groundwater conditions support irrigation and farm activity, though rabi prospects require monitoring.

External risks persist, with renewed geopolitical tensions, weaponization of supply chains, and energy price volatility keeping global financial conditions tight. Geopolitical polarization and supply shocks in various sectors could restrain growth. Developed world interest rates are rising, which will impact domestic bond yields and possibly slow cross-border capital flows as investors stay in their home markets amid rising uncertainty.

Inflation risks from climate, geopolitical, and monetary factors are present, with a strong El Niño potentially harming the rabi crop through heat stress and lower soil moisture. The RBI's recent open market operations to absorb excess liquidity could help maintain financial balance and curb demand-side overheating. The government's proactive supply-side and market measures could also cushion temporary price pressures.

Although the labour market has remained robust despite rapid AI adoption, recent Consumer Confidence Survey reveals households are pessimistic about immediate job availability, despite optimistic year-ahead expectations. Strengthening near-term job creation through better access to employment opportunities, demand-linked skilling, and improved job matching is crucial.

The external sector remains resilient, thanks to strong services exports, high remittance inflows, comfortable foreign exchange reserves, and sustained capital inflows. However, the Review emphasizes that sustained, high-quality, and consistent decision-making is key to reassuring investors. Moreover, India must prioritize a competitive economy over a business-friendly one for long-term success and innovation.