India's economy is poised to maintain a robust growth trajectory despite global headwinds, with domestic factors like a revival in private investment and sustained foreign interest acting as key pillars, according to a recent outlook by CareEdge Ratings. The agency projects the country's Gross Domestic Product (GDP) to expand by 7.5% in the fiscal year 2025-26 (FY26) and 7% in FY27.
Domestic Drivers: Capex Revival and Strong Fundamentals
CareEdge highlights early but promising signs of a recovery in India's private capital expenditure (capex) cycle. This is evidenced by a sharp 20.7% year-on-year growth in the order books of a sample of capital goods firms in FY25, with the momentum continuing into the first half of FY26. Sectors like oil and gas, power, telecom, automobiles, and metals are leading this investment charge.
Rajani Sinha, Chief Economist at CareEdge, pointed out that foreign investors are increasingly attracted to India's growth story, particularly in new-age sectors. "Gross foreign direct investment inflows are rising, especially into electric vehicles, renewable energy, electronics, data centres, and artificial intelligence infrastructure," Sinha stated. She added that factor market reforms, including the implementation of new labour codes, could further bolster investor confidence.
On the domestic front, growth in H1 FY26 was supported by healthy agricultural activity, tax relief, GST rationalisation, RBI rate cuts, and festive demand. However, growth is expected to moderate to around 7% in H2 FY26 as the effect of front-loaded exports fades and post-festive consumption normalises.
External Sector: Trade Resilience and Manageable Deficits
India's external position appears manageable, with the current account deficit projected to stay around 1% of GDP in both FY26 and FY27. This stability is underpinned by strong services exports and steady remittance inflows.
Merchandise trade data shows resilience. Despite steep reciprocal tariffs imposed by the US from late August, the United States remained India's top export destination during April–November 2025. Exports to the US grew 11.4% year-on-year to $59.04 billion. Total bilateral trade between the two nations reached $103.85 billion, marking a 10.5% increase.
A notable improvement was seen in November's trade deficit, which narrowed sharply to $24.53 billion from $41.68 billion in October, as import demand moderated while exports held steady. However, merchandise exports are expected to contract by about 1% in FY26 due to the impact of US tariffs on labour-intensive sectors like gems & jewellery and textiles.
Fiscal Health and Inflation Outlook
On public finances, CareEdge expects the central government to meet its fiscal deficit target of 4.4% of GDP for FY26, narrowing further to 4.2–4.3% in FY27. This is despite gross tax collections growing only 4% year-on-year in the first seven months of FY26, as a 22% rise in non-tax revenues—aided by a higher RBI dividend of ₹2.7 trillion—provided an offset.
Inflation has remained benign, with about 75% of items in the Consumer Price Index (CPI) basket recording inflation below 4%. CPI inflation is projected to average 2.1% in FY26 before rising to about 4% in FY27 as the low base effect wanes.
Global Context and India's Standing
The report cautions that global economic conditions remain challenging, with growth below pre-pandemic averages due to slowing trade and subdued FDI. It notes a gradual move away from the US dollar in global trade and a rise in central bank gold purchases as a hedge.
Despite these shifts, India remains a highly attractive destination. CareEdge estimates India's risk-adjusted return on inward FDI at 7.2%, second only to Indonesia among major emerging economies. This underscores the country's relative strength and potential to navigate a complex global landscape while sustaining its growth momentum.
