Will India’s growth rate rise or fall this financial year? Depends on which variable you pick

Will India be able to maintain this rate of growth? And what will happen to other key macroeconomic indicators, such as the rupee’s exchange rate, India’s foreign exchange reserves, domestic prices, and corporate investments in the economy?

Factors at play

Even at the best of times, macroeconomic performance depends on several factors, but over the past few months, the overall economic environment has turned particularly challenging for India. This can be attributed to:

War in West Asia: This is possibly the most important factor in the short term. If hostilities heighten further, it could not only lead to crude oil prices rising again but also constrain supply itself.

Given that India imports 90% of its crude oil, higher crude oil prices alone can typically drag down domestic economic growth. As things stand, there is no clarity on how things may pan out in West Asia, and the picture keeps changing every week.

Monsoon: Even though agriculture only contributes around 17%-18% of India’s total economic output (in money terms), it still engages close to 45% of India’s population. The spread and quantity of rainfall are not only the biggest determinants for India’s agricultural output but also the key factors that make or break rural household budgets.

Trade deficit: India’s exports have largely been stagnant over the past few years. This means, as a country, India does not earn enough foreign currency. At the same time, India’s imports continue to be in excess of its exports, thus leading to an outflow of foreign exchange. Whether India can turn around this equation or, at the very least, reduce this gap (called the trade deficit) is a major question now.

Attracting foreign investments: Weakening of foreign investments into India has been a key underlying reason for the slide in the rupee’s exchange rate relative to major currencies. Will India be able to attract foreign investments this year?

Inflation and affordability: A natural corollary of higher crude oil prices is the spike in domestic inflation (or the rate at which prices go up). Higher prices reduce people’s purchasing power and drag down domestic growth.

Uncertainty: There is no standard metric to capture uncertainty, but nevertheless, sustained levels of uncertainty — be it due to global geopolitical factors or domestic ones — undermine business confidence and hold back even domestic firms from investing in new capacities (read factories and jobs) in the economy.

What’s the outlook?

On economic growth, India’s outlook can be read as both better and worse, depending on the variable one looks at.

The actual observed variable on the ground is called the nominal gross domestic product (GDP). It determines how much money the government can spend, how much it earns through taxes, and how much it needs to borrow to make up the gap. In common parlance, another measure is used: the real GDP growth, which is essentially the GDP growth rate after taking away the effect of inflation or higher prices.

The way things are panning out, it is quite likely that India’s nominal GDP growth rate may be higher than in the past few years, even as its real GDP growth rate may falter.

Over the past few years, India’s nominal GDP has been experiencing deceleration. This has been a matter of concern among policymakers and observers alike. That’s because this rate of growth sets the ceiling for the real GDP growth. It is also a key determinant in the profitability of India’s companies and, as a result, determines the fortunes of stock markets.

But thanks to higher inflation, the nominal GDP growth rate is likely to improve this year (see chart 1).

Chart 1.

However, when it comes to real GDP growth rate, most estimates — both international (such as the International Monetary Fund’s recent World Economic Outlook) and national (such as by the Bank of Baroda) — expect a deceleration in the current financial year. The exact severity of the deceleration is difficult to ascertain, but most estimates peg India’s GDP to grow by anywhere between 6.4% and 6.8% (see chart 2).

Chart 2.

As a recent Bank of Baroda analysis noted, India’s manufacturing is likely to register a substantially lower (real) growth rate in the current year — from a growth rate of 10.5% in FY26 to 6.5%-7.5% in FY27 — partly thanks to a higher base effect and partly due to the impact of war on supply chains and overall demand.

Unsurprisingly, economists also expect corporate investments to grow at a slower pace thanks to the continuing uncertainty. India’s trade deficit, too, is likely to widen, but thanks to the measures undertaken by the RBI aimed at attracting foreign capital into India, India’s overall Balance of Payment is likely to improve. This, in turn, is likely to provide support for the rupee’s exchange rate in the year ahead.