India’s growth story is moving forward on the back of strong domestic demand, investment and services, but the global environment has become more complex than before. Wars, trade tensions, energy prices, changes in supply chains and the new wave of AI-based investment are creating both opportunities and risks for India.
On one hand, the economy is maintaining a strong pace, with positive signals coming from exports, FDI and manufacturing. On the other hand, external dependence on oil and fertilisers, along with rising competition for global capital, is making the road ahead more difficult.
Let us understand India’s growth story in detail and see which factors could determine its future direction in a changing global economy.
What’s Happening?
India has remained one of the world’s fastest-growing economies since FY22. The economy recorded 7.8% growth in Q1 FY27, while real GDP growth is estimated at 7.3% for the July-September quarter. In addition, according to Mint, analysts believe that the economy is expected to expand by 6.8-7% for the full financial year.
Domestic activity is also showing signs of strength. GST collections crossed Rs 2 lakh crore in September, while the Manufacturing PMI reached a seven-month high of 55.1. Between April and July, net FDI increased 38% to $13.4 billion, while gross FDI inflows stood at $43.9 billion.
Forex reserves stood at $765.9 billion as of September 18. Merchandise and services exports are projected to reach $1 trillion in the current financial year. Exports had already crossed $400 billion in the first five months of FY27, while goods exports increased 26.1% in August.
External Shocks and Import Dependence
One of India’s major weaknesses is its external dependence on energy and essential inputs. Crude oil import dependence increased from 77.6% in 2013-14 to 88.2% in 2024-25. Effective external dependence on fertilisers is around 68-70%, while nearly 85% of the natural gas used in domestic urea production is imported.
In such a situation, wars, shipping disruptions and sharp increases in crude prices can affect inflation, the rupee and the current account. Over the past one month, the 10-year US Treasury yield rose 52 basis points to 5.32%, while the yield on Indian government securities of the same maturity increased 25 basis points to 7.21%.
In addition, a US law gives the President the authority to impose tariffs of up to 100% on countries purchasing Russian crude, which could increase trade uncertainty.
The Challenge of Manufacturing, Capital and AI
Manufacturing’s share in India’s economy has remained in the 15-18% range for around three decades. It stood at 17.2% in 2013-14, 18.5% in 2021-22, 17.3% in 2023-24 and declined to 15.2% in 2024-25.
The PLI scheme covers 14 sectors and has an approved outlay of around Rs 1.91 lakh crore. Despite progress in electronics and pharmaceuticals, power and logistics costs, small manufacturing units and limited integration with global networks remain challenges.
At the same time, AI is also changing the direction of global capital flows. Developed countries are attracting capital for manufacturing and AI investment. For India, the challenge is to maintain the existing strength of its services sector while increasing participation in the changes being created by AI.
What Does This Mean for Investors?
The current picture is a mix of a strong domestic economy and rising external risks. Inflation in around 69% of the items in the retail price gauge remained well below the 4% medium-term target. Bank credit, services activity and employment have also shown positive signals.
On the other hand, global interest rates, crude oil, tariffs and AI-driven capital flows could affect capital availability and market sentiment in India. Therefore, apart from GDP growth, FDI, exports, bond yields, the rupee and manufacturing competitiveness will also remain important indicators for understanding the direction of the economy.
What’s Next?
According to Shaktikanta Das, Principal Secretary to the Prime Minister, reforms such as GST, banking reforms, flexible inflation targeting, digital payments and fiscal prudence have brought India’s economy very close to 8% growth. He said that many of the reforms undertaken over the past decade were not meant only for immediate needs, but were also designed to strengthen the economy’s ability to handle external shocks better and recover quickly.
Looking ahead, the pace of economic activity is expected to accelerate over the next five years, with AI likely to play a larger role. AI can influence productivity, public service delivery, scientific discovery, healthcare and education. At the same time, emphasis has also been placed on deepening the corporate bond market, pension and insurance funds, municipal finance and new infrastructure financing models.
Disclaimer: This article is for educational and informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The companies mentioned are cited as examples within the context of market developments. Investors are advised to conduct their own due diligence and consult their financial advisor before making any investment decisions.
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