Is the India story back?

Is the growth story back? Many economists are now seeing a synchronised improvement in India's macroeconomic fundamentals. They say that, after nearly 2 years of navigating geopolitical conflicts, elevated energy prices, persistent foreign selling and currency volatility, the external environment, till at least last fortnight, was beginning to turn supportive. Of course, such hope was predicated, to an extent, on what the unpredictable Mr Donald Trump does next. Whether he actually tears up the MoU he signed with the Iranians to bring peace to West Asia or gives in to his TACO (Trump Always Chickens Out) pattern of behaviour was always a matter of conjecture.

Trump chose to ramp up pressure on Iran. Is that a matter of concern? Partly yes, but mostly no. Of late, the economy has been displaying stellar resilience. At the time of writing, robust Q1 earnings and other supportive domestic cues have lifted investor sentiment. Even IT majors have shrugged off the challenge of AI and reported better-than-expected earnings.

Another sign of the times is the trajectory of Indian equities, which underperformed most major Asian markets earlier this year. Overseas investors sold roughly $30 billion worth of Indian equities over just three-and-a-half months during the first half of 2026, using India as a funding market as geopolitical tensions, higher oil prices and currency weakness weighed on sentiment. Since mid-June, however, foreign investors have returned as modest net buyers, largely into financial stocks, suggesting the worst of the selling cycle may be over. Goldman Sachs has now set a June 2027 Nifty target of 26,500, implying about 10 per cent upside from current levels.

Oil prices that tanked shares of refiners and airlines are not as high as they were in April-May. India, like other countries, has used the peace interregnum to establish a new source of oil imports from Venezuela. Russia's share of India's oil imports rose above 40 per cent in May, the highest in nearly 2 years. Russia, now burdened by the Ukraine war, is, of course, charging India a premium for its oil. But other sources, such as the US and even the UAE, are selling India oil at lower-than-average prices. That may reduce inflationary concerns to an extent and brighten prospects for economic growth.

Weathering external shocks

Bolstering sentiment are estimates from leading economists about GDP growth in the April-June quarter, a period when the battle over the Strait of Hormuz was at its fiercest. Though the actual number is yet to be officially declared, all estimates point to the fact that the economy has weathered external shocks better than expected. Samiran Chakraborty, Citi India's Chief Economist, expects GDP growth to remain above 7 per cent in the April-June quarter, supported by high-frequency indicators such as credit growth, exports and automobile sales. That will come on the back of GDP growth of 7.8 per cent in the January-March quarter. This, incidentally, was the period when American and Israeli bombers were letting ‘hell loose’ (to use a Trumpian phrase) on Iran.

Santanu Sengupta, Chief India Economist at Goldman Sachs, also says the economy has remained resilient despite global uncertainties, supported by strong credit growth, the impact of earlier monetary policy easing and, of course, easing oil prices. He attributed this to the country's energy resilience, healthy inventory levels, stronger refining capacity and the increasing use of renewable energy, which helped cushion the impact of geopolitical tensions in the Middle East.

However, as a large part of GDP comes from corporate earnings, it is the corporate earnings numbers for the quarter that will be a solid indicator. Though the final figure may have to be tweaked a little up or down, for now, 7 per cent growth is a real possibility, and there is good reason behind it. The stimulus in 2025 gave the economy a certain momentum, which was probably enough to counter the headwinds arising from the conflict in the Middle East.

Samiran Chakraborty opines that, even during the conflict, two things worked in India's favour. India does not generate power from natural gas, and it had enough diesel and petrol stocks because it is a refining economy. Due to these two factors, power and transport, two of the most important drivers of growth, were not affected. With that stimulus and these two supporting factors, the economy performed well throughout the April-June period. But what happened in India was also true for many other emerging markets.

Just two months ago, at the height of the Iran war, there were projections by S&P Global and Crisil that GDP growth would moderate to 6.6 per cent in the current fiscal from the earlier estimated 7.1 per cent. S&P Global and Crisil's joint report, titled India Forward, said the country was facing external economic shocks from energy supply disruptions, rising oil and gas prices and currency volatility, and that India should devise a comprehensive energy storage policy to create strategic buffers. But that was two months ago.

“The fall in commodity prices altered the macro-outlook for India almost overnight,” said Sandip Sabharwal, investment advisor and founder of research house Asksandipsabharwal.com, in Mumbai last fortnight. “Lower commodity prices, improving capital flows and stable interest rates create an environment where earnings upgrades are likely to exceed downgrades over the coming quarters.”

Corporates, too, exuded optimism. “Our growth story remains intact even as the world continues to grapple with uncertainty. Backed by robust domestic consumption, policy continuity and an increasingly aspirational consumer base, India will continue to be among the fastest-growing economies in the world,” said Mohit Burman, chairman of FMCG major Dabur India. His company's own performance mirrored this resilience, with consolidated revenue growing 5 per cent to Rs 13,193 crore during the fiscal.

The FTA boost

That is why even senior functionaries of the Modi government are suddenly cocky about our economic prospects. “India has successfully managed the economic fallout of the West Asia crisis that began on 28 February and continues to remain the fastest-growing major economy in the world, registering strong growth amid the signing of free trade agreements (FTAs) and robust domestic consumption,” Nirmala Sitharaman, Finance Minister, said in a recent interview with leading French newspaper Le Figaro. Turning to the raft of FTAs signed by India, she singled out the one with the European Union after protracted negotiations and claimed it “will have a considerable impact on global trade itself”.

One of the key FTAs that India signed with the United Kingdom has now become operational. The deal, negotiated over 4 years and marked by major political volatility in London, is India's first comprehensive agreement with a developed country. Labour-intensive industries will now get a boost. Textile exports, for instance, currently face tariffs of up to 10 per cent in the UK. The trade deal could place India on a more level playing field with competitors such as Bangladesh, thereby boosting exports. Gems & jewellery exports, along with footwear exports, will also get a boost, as duty in the UK has been eliminated from up to 12 per cent and 16 per cent respectively. Commerce Secretary Rajesh Agarwal says that quotas allocated by the UK will ensure that India's iron and steel exports increase from around $850 million to over $1 billion.

The new swag being seen around Union ministers marked a significant change from the caution being exercised less than two months ago, when Prime Minister Narendra Modi urged citizens to avoid international travel, postpone gold purchases for a year, and reduce both car use and cooking oil consumption. They appear enthused by US President Donald Trump's praise of India's economic performance, saying the country is “doing very well”, marking a sharp shift from his remarks last year when he described India as a “dead economy” amid trade tensions. “You have a couple of countries, India is one, doing very well at 7-8 per cent,” he said in a CNBC interview.

Economists believe that four macro variables have acted as headwinds aligned in India's favour, significantly improving the probability of a sustained market upcycle. First, the Indian rupee is finding stability. A stable rupee reduces the risk of capital erosion, moderates imported inflation and strengthens confidence in India's macroeconomic management. More importantly, currency stability provides businesses with greater visibility over costs and investment decisions. At a time when global capital is searching for predictable growth destinations, this is a significant competitive advantage for India.

Second, the prolonged conflict in West Asia had kept economic management and financial markets on edge because its implications extended far beyond the region. Every escalation carried the risk of supply chain disruptions, higher energy prices and renewed inflationary pressures across the world. As tensions begin to stabilise, investors are once again shifting their focus from geopolitical uncertainty to economic fundamentals. While geopolitical risks can never be completely eliminated, lower uncertainty improves global risk appetite.

Third, crude oil has turned from a headwind into a tailwind. For an economy that imports nearly 85 per cent of its crude oil requirements, few variables matter as much as energy prices. A sharp correction in crude oil improves India's current account, eases inflation, strengthens fiscal flexibility and enhances corporate profitability. Lower logistics and input costs benefit sectors ranging from manufacturing and transportation to chemicals and consumer businesses.

Stable inflation

Perhaps most importantly, softer inflation expands the Reserve Bank of India's policy flexibility. Stable inflation, comfortable liquidity and lower borrowing costs together create an environment conducive to stronger economic growth and higher corporate earnings.

The fourth, and arguably the most powerful, force is entirely domestic. For decades, India's equity markets were largely at the mercy of Foreign Portfolio Investors (FPIs). Whenever overseas investors turned sellers, domestic markets struggled to absorb the pressure, often resulting in sharp corrections. That market structure has fundamentally changed.

The steady rise of systematic investment plans (SIPs), expanding mutual fund participation and the financialisation of household savings have created a structural domestic liquidity engine. Monthly SIP inflows now represent a powerful and consistent source of capital that has repeatedly demonstrated its ability to absorb large bouts of FPI selling.

“For perhaps the first time in modern market history, India possesses a meaningful domestic counterbalance to volatile global capital flows. That significantly reduces one of the biggest historical risks associated with investing in emerging markets," opines Jimeet Modi, CEO and Founder of SAMCO Securities.

Consumption is hopefully set for a strong recovery. Falling interest rates and potential oil price declines are boosting confidence. Sectors such as automobiles, electronics, travel and consumer durables are leading a multi-year revival. In the air travel sector, for instance, the growth rate of air passenger traffic appears set to overtake that of China in 2026. India is likely to be the world's fastest-growing large aviation market over the next three decades, according to projections by global airports industry body Airports Council International.

While China's aviation market is notably larger than India's, the pace of the latter's growth is expected to gather momentum amid rapidly rising air travel demand from a massive population base with low per capita air travel, pointing to significant growth potential. At the commercial launch of the Noida International Airport in Uttar Pradesh's Jewar, Christoph Schnellmann, vice chairman, expressed confidence that the airport would handle 5 million passengers within 10-12 months. The number may rise further, with overseas flight operations expected to begin by the end of 2026.

India's consumption story has always been domestic. Tax cuts are already in place. This positive shift is expected to drive spending across various sectors. Experts see this as a broad-based improvement.

The optimistic case that India will emerge as a major manufacturing exporter may take time. In the interim, the capital account remains India's most immediate lever for funding investment, supporting the rupee and financing infrastructure. The current tax framework unnecessarily discourages precisely the kind of long-term foreign capital India needs.

That is why the government's move to cut equity capital gains tax for FIIs makes sense; it will boost the economy and lower the cost of borrowing. For long, the sticking point for foreign investors has been the capital gains tax (CGT) regime, viewed by them as outdated and anomalous. The CGT regime was increasingly seen as an avoidable impediment to fresh allocations by large global investors to India, particularly given that most competing markets do not impose comparable capital gains taxes on FIIs. With foreign ownership of Indian stocks at a 15-year low, the question was how the government could restore India's standing as a preferred destination for global allocators. Given the prevailing macroeconomic constraints in India, reducing equity CGT rates for FIIs appears to be one of the few policy levers available to the finance ministry that can improve India's competitiveness for global capital without materially compromising fiscal consolidation.

The arithmetic of a tax exemption targeted at FIIs is straightforward. CGT collections on listed equities are approximately Rs100,000 crore a year. With foreign investors owning only around 15 per cent of India's listed market capitalisation, a simple ownership-based approximation suggests a revenue impact of around Rs15,000 crore (around $1.5 billion). The potential macroeconomic benefits to India, however, accrue across a much larger base: India's Rs200,00,000 crore sovereign debt market, the exchange rate, and domestic financing conditions.

By strengthening the capital account and reducing the risk premium embedded in Indian financial assets, a tax cut could lower sovereign borrowing costs, support the rupee and ease imported inflation. According to Mohandas Pai, chairman of Aarin Capital, even a 50-basis-point reduction in sovereign yields would save the exchequer roughly Rs 8,000 crore in the first year on new issuance alone, with the benefits compounding over time as debt is refinanced at lower rates.

Structural transformation

India's biggest cities are creating more jobs than ever before. But those jobs are increasingly concentrated in services rather than factories or farms, underscoring how the country's urban economy is undergoing a structural transformation. The latest Labour Market Dynamics in Million-plus Cities report, released by the National Statistics Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI), shows employment in India's 46 million-plus cities is being driven by transport, communication and a broad range of services, while agriculture now accounts for only a tiny fraction of urban jobs.

Based on the Periodic Labour Force Survey (PLFS) 2025, the report provides official labour market estimates for India's largest urban centres for the first time. Calling it ‘a significant step towards strengthening urban statistics in India’, the ministry said the city-level estimates would help support evidence-based policymaking as cities increasingly emerge as ‘key engines of economic growth and job creation’.

The clearest takeaway from the report is that India's largest cities are increasingly dominated by service-sector employment. Only 1.6 per cent of workers in million-plus cities are employed in agriculture, compared with 10.1 per cent across the rest of urban India. Instead, employment is concentrated in transport, storage and communication, which account for 13.6 per cent of workers, and in other service sectors, including finance, real estate, professional services, education, healthcare and public administration, which together employ 31.5 per cent of the workforce.

The data suggest India's biggest cities are steadily shifting away from traditional occupations towards logistics, communications and high-value services. The report also highlights a marked difference in the quality of employment. Regular salaried jobs account for 58.5 per cent of employment in million-plus cities, compared with 42.9 per cent in the rest of urban India. Casual labour accounts for only 6.3 per cent of workers, less than half the 14.4 per cent recorded in other urban centres.

The ministry noted in the report that more than 55 per cent of workers in million-plus cities were engaged in regular wage or salaried employment, while the share of casual labour was nearly half that observed across urban India. The findings indicate that India's largest cities are generating more stable, formal employment than smaller urban centres.

Another distinguishing feature of million-plus cities is the prominence of organised businesses. According to the report, 24.3 per cent of workers are employed in public or private limited companies, compared with 17.2 per cent across urban India. The higher presence of corporate employers reflects the concentration of organised economic activity in larger cities.

 Other factors have contributed to the feel-good factor as well. India's lack of AI plays has been a hurdle for most of the year as investors turned to markets like South Korea and Taiwan that delivered stellar returns. But with concerns mounting over the sustainability of that trade, interest in India is slowly returning.

But that is not to say that everything is hunky-dory. The El Niño factor is one worry. Kharif sowing remained behind schedule in early July, with acreage nearly 6 per cent below the normal area and 21 per cent lower than last year's levels, as a weak monsoon continued to weigh on planting across several crop categories. Total area sown under kharif crops stood at 350.85 lakh hectares as of 5 July, compared with 442.80 lakh hectares during the same period last year, according to data released by the Agriculture Ministry. The current sowing level was also below the normal area of 373.31 lakh hectares, indicating that planting has yet to recover from the early-season rainfall deficit.

The shortfall has been most pronounced in oilseeds, where acreage fell to 66.31 lakh hectares, sharply lower than 109.27 lakh hectares a year ago and below the normal area of 83.46 lakh hectares. Cotton sowing also remains under pressure. Acreage under cotton was 63.18 lakh hectares, lower than 82 lakh hectares last year and the normal area of 76.12 lakh hectares. Rice sowing stood at 60.24 lakh hectares, compared with 69.30 lakh hectares last year and a normal area of 66.57 lakh hectares.

However, if the southwest monsoon advances quickly into more parts of the North Arabian Sea, Gujarat, the remaining parts of Haryana and Punjab, and more parts of Rajasthan, and there is widespread rainfall across several regions, including parts of northwest, central, east, northeast, west and peninsular India, as is being predicted, it could make up for the rainfall deficit.

Less dependent on monsoons

Historically, deficient monsoons often translated into sharp declines in agricultural output and rural incomes. In 2002, for instance, rainfall fell to 81 per cent of the long-period average, leading to a steep drop in foodgrain production and a severe contraction in rural disposable incomes. However, that correlation has weakened over the past decade. India continued to register rising foodgrain production despite below-normal monsoons in 2018-19 and 2023-24.

Of late, the Indian economy has become significantly less dependent on the monsoons than commonly perceived, with expanding irrigation networks and shifting cropping patterns insulating agriculture and rural demand from the kind of shocks seen in previous decades.

According to brokerage firm Bernstein, the traditional narrative that nearly 60 per cent of India's agriculture depends on monsoon rainfall no longer reflects ground realities. The brokerage argues that the country's relationship with rainfall has undergone a ‘structural reset’. ‘Monsoons aren't impacting India the way they used to, and the changing dynamics warrant a reset in how we perceive rainfall and its effects,’ Bernstein said in a note.

That could be the silver lining in the El Niño threat being talked about. But that does not mean we should let complacency creep in. India needs to become more competitive to take advantage of the recently signed free trade agreements (FTAs), which provide market access through lower tariffs. “You got market access through lower tariffs... Now what you need to do is become more competitive, and that requires a variety of reforms,” Dharmakirti Joshi, Crisil Chief Economist, said.

India should devise a comprehensive energy storage policy to create strategic buffers to tackle energy supply disruptions and rising oil and gas prices. It should also focus on reforms in energy and food security, and the fertiliser sector.

Ajay Shankar, former secretary, Ministry of Power, says that the US-Iran war and the emerging geopolitical tensions make it imperative for India to move quickly away from excessive dependence on imported fossil fuels and rapidly scale up its renewable energy sector. Strategic R&D expenditure by the government in key sectors is crucial to important parts of the value-addition chain.

Indeed, India needs to draw lessons from the last 2 years of geopolitical turmoil to insulate the economy further from wars that are not of our making. It should also play a proactive role in dousing conflagrations wherever they occur and speaking out whenever necessary. Diplomatic silence does not sit well with economic heft. The recent destruction of the Chabahar project in Iran, in which India has strategic stakes, by the US did not evoke even a semblance of protest from India.