India's Economy to Grow at 6.5% in FY26 Despite Global Tensions Says EAC-PM Chief
NOOR MOHMMED
16/Jul/2025

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India expected to achieve 6.5% GDP growth in FY26 despite geopolitical tensions and trade policy uncertainties, says EAC-PM Chairman.
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Growth drivers include low inflation, RBI rate cuts, good monsoon, rising public capital expenditure, and healthy private consumption.
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EAC-PM also highlights strong FDI inflows, mature investment climate, and scope for private capex as key positives for sustained growth.
India’s Economy Expected to Grow at 6.5% Despite Global Headwinds
The Indian economy is projected to grow at 6.5% in the financial year 2025-26 (FY26), despite mounting geopolitical tensions and trade policy uncertainties globally. This projection comes from S. Mahendra Dev, Chairman of the Economic Advisory Council to the Prime Minister (EAC-PM).
In an interview on July 15, 2025, Mr. Dev outlined the basis for this positive forecast, pointing to low inflation, a good monsoon, and a benign interest rate environment thanks to three consecutive rate cuts by the Reserve Bank of India (RBI).
The Context: Global Headwinds
Mr. Dev acknowledged the "significant global headwinds", describing them as twin shocks arising from:
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Geopolitical tensions, such as conflicts disrupting trade routes and commodity markets.
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Trade policy uncertainties, including tariff wars and restrictions impacting global supply chains.
Despite these challenges, he asserted that India remains resilient and continues to be the fastest-growing large economy.
High-Frequency Indicators Point to Resilience
High-frequency economic indicators for the first two months of FY26 show that:
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Domestic consumption is holding up well.
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Industrial output is steady.
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Services sector remains robust.
According to Mr. Dev, these early trends make a 6.5% GDP growth rate for FY26 feasible, reinforcing India’s strong medium-term growth prospects. He credited sound fiscal management for supporting the country's growth story.
Low Inflation as a Key Driver
One of the biggest positives for India's growth outlook is the decline in inflation:
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CPI headline inflation stood at 2.1% in June 2025, the lowest year-on-year reading since January 2019.
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Food inflation in June was -1.06%.
Assuming a normal monsoon, the RBI has projected inflation at 3.7% for FY26.
Low inflation boosts:
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Purchasing power of households.
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Investment confidence.
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Overall economic stability.
The Role of RBI’s Monetary Policy
The RBI has taken proactive steps to support growth:
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Three back-to-back rate cuts have reduced borrowing costs.
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A cash reserve ratio (CRR) cut has increased liquidity in the banking system.
These measures have:
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Made loans cheaper for consumers and businesses.
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Encouraged investment in both urban and rural areas.
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Supported overall credit growth in the economy.
Good Monsoon: A Big Boost for Agriculture
Mr. Dev emphasised that a good monsoon is critical for:
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Agricultural output, ensuring food security and low food inflation.
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Rural incomes, supporting demand for goods and services.
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Supply chain stability, reducing price volatility.
He expects this year’s monsoon to be normal, strengthening the rural economy and food price stability.
Government Capital Expenditure as a Growth Catalyst
Government capital expenditure (capex) is another major growth driver:
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The Union Budget 2025-26 increased allocations for highways, railways, urban infrastructure, and rural development.
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State governments are also attracting domestic and foreign private investment.
Mr. Dev said public capex has a multiplier effect:
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Stimulates private investment.
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Creates jobs.
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Improves connectivity and productivity.
Studies show that investments in national highways and rural roads significantly boost economic activity in surrounding areas.
Private Consumption and Investment Outlook
Mr. Dev noted positive signs in private consumption:
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Urban demand is supported by lower inflation and cheaper credit.
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Rural demand benefits from good harvest expectations and government spending.
He also highlighted green shoots in private investment:
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Corporate balance sheets are healthier.
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Many companies have turned debt-free and doubled cash reserves.
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Banks are profitable and have strong balance sheets.
However, he acknowledged that:
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Some companies may be cautious due to global uncertainties.
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Overcapacity in certain countries (e.g., China) limits global demand.
He urged Indian companies to deploy cash reserves into new capacity, creating jobs and driving growth.
Foreign Direct Investment (FDI): Mature and Growing
On FDI trends, Mr. Dev offered a nuanced view:
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Global FDI inflows grew only 3.7% in 2024, much lower than their 2015 peak.
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India's FDI inflows increased 14% in FY25.
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Net FDI moderated due to higher outward FDI and repatriations.
He argued that outward FDI and repatriations are normal for a mature market, enabling investor confidence:
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Exit options are essential for attracting new investment.
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Non-resident deposits and external commercial borrowings (ECBs) showed higher net inflows in FY25.
Overall, India remains an attractive destination for foreign investment.
IMF and World Bank Projections
While EAC-PM estimates a 6.5% growth rate for FY26, other agencies are more cautious:
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IMF projects 6.2%.
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World Bank projects 6.3%.
They cite uncertain global environment and high trade tensions. Despite these lower forecasts, India would still be the fastest-growing major economy.
Domestic Tailwinds Supporting Growth
Mr. Dev outlined multiple domestic tailwinds:
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Low inflation, supporting purchasing power.
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Rate cuts boosting credit availability.
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Good monsoon lifting agricultural output.
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Government capex creating infrastructure and jobs.
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Tax reductions enhancing disposable incomes.
He said these factors will raise both rural and urban demand, driving investment, consumption, and exports.
Supply Side Drivers
He also highlighted supply-side strengths:
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Agriculture performing well with good monsoons.
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Services sector remaining robust, especially IT and financial services.
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Manufacturing expected to improve with higher demand and investment.
Risks and Challenges
Mr. Dev cautioned against complacency:
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Geopolitical tensions could disrupt trade and raise commodity prices.
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Tariff wars can limit export opportunities.
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Volatile crude oil prices remain a risk.
He emphasised the need to remain watchful of these factors while building on domestic strengths.
Policy Recommendations
To sustain growth, Mr. Dev suggested:
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Continuing monetary policy support with flexibility to respond to inflation shocks.
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Enhancing ease of doing business, especially at the state level.
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Deregulation and reducing compliance burdens to facilitate private investment.
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Maintaining sound fiscal management to avoid debt stress.
Corporate Sector’s Role
Mr. Dev pointed out that many firms are:
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Debt-free
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Sitting on large cash piles
He urged India Inc to invest in new capacity, rather than holding cash idle. He believes increasing rural and urban demand will create opportunities for profitable investment.
Capital Availability
He noted no shortage of capital:
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Banks are well-capitalised.
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Corporate sector is profitable.
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Investor confidence remains strong.
He argued that with government capex leading the way, private capex will follow as demand rises and global uncertainties reduce.
Long-Term Outlook
Despite global challenges, Mr. Dev said India’s medium-term growth prospects remain robust:
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Young, growing population.
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Rising incomes.
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Expanding infrastructure.
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Improving governance.
He said India can continue to be a magnet for global investment if it maintains policy stability and reform momentum.
Conclusion
Despite geopolitical tensions and trade policy uncertainties, India is projected to grow 6.5% in FY26. The Economic Advisory Council to the Prime Minister expects low inflation, good monsoon, supportive RBI policies, and rising government capex to drive growth.
Strong fundamentals in agriculture, services, and manufacturing, along with FDI inflows and healthy corporate balance sheets, further strengthen the outlook. Policymakers must remain vigilant about risks while capitalising on domestic strengths to deliver sustained, inclusive growth.
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