India's growth silver linings face war and drought clouds
India’s GDP growth hit a 12-quarter high of 7.7% in Q4FY26, surpassing forecasts of 7.2-7.3%, driven by strong private investment and agriculture, but risks loom from a potential below-normal monsoon and trade disruptions. Private sector capital formation grew 10.8% YoY, while services and agriculture offset industrial slowdowns, though net exports remained a drag at -2.2% of GDP for FY26, with energy import costs posing future challenges.
India’s economy closed fiscal year 2025-26 with a GDP growth rate of 7.7%, the highest in 12 quarters and above economist expectations of 7.2-7.3%. The growth was broad-based, with agriculture expanding 3.6% (up from 1.7%) due to a strong rabi harvest and services accelerating to 9.6% (from 7.8%), led by trade, transport, and communication. However, industrial growth slowed to 4.5% (from 6.4%), with manufacturing declining sharply to 7.3% (from 12.8%). Private sector investment drove growth, as gross fixed capital formation rose 10.8% year-on-year despite central government capex contraction. Private final consumption expenditure eased to 7.1%, its weakest pace in four quarters, while net exports improved slightly to -1.4% of GDP in Q4 but remained a drag at -2.2% for FY26, weighed by energy import costs. Risks for FY27 include a potential below-normal monsoon, threatening agriculture and raising food prices, which could further slow manufacturing and services. Trade dynamics may worsen as energy import bills rise alongside shipping and insurance costs, reversing Q4’s modest trade balance improvement. Government spending restraint also played a role, with central capex contracting in the December and March quarters to meet fiscal deficit targets. Economists warn that sustained private investment momentum and consumption resilience will be critical to offset external pressures, including geopolitical disruptions and climate-related risks.
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