India’s economic engine is expected to stay firmly on track in FY27, with real GDP growth projected at 7-7.2%. The growth comes on the back of strong domestic demand and continued government spending on capital projects supporting economic activity, EY said in a recent report.The firm has pegged nominal GDP growth at 12.5-13%, saying that India’s growth prospects remain relatively strong even as geopolitical uncertainty, high crude oil prices and a weaker global trade environment pose challenges.Industrial activity picks up paceA stronger performance by the industrial sector has added to the growth outlook. India’s Index of Industrial Production (IIP) expanded 7.3% in June 2026, its fastest pace in 23 months. Industrial growth averaged 5.7% during the first quarter of FY27, marking its strongest performance in eight quarters.Manufacturing was a key contributor, with output increasing 7.8%. Electrical equipment, motor vehicles, textiles and food products were among the better-performing segments.PMIs signals moderationThere are, however, signs that the pace of expansion may be moderating. Manufacturing PMI fell to 53.5 in July from 54.2 in June, while services PMI dropped to 53.3 from 57.4. Both remained above 50, indicating that the two sectors continued to expand.Credit conditions also remained supportive. Gross bank credit growth accelerated to 18.6% in June, its highest level in 25 months, EY said.Capex push supports growthGovernment spending is another key pillar of the outlook. Capital expenditure growth rebounded to 23.7% in the first quarter of FY27, reversing a 23.3% contraction in the fourth quarter of FY26. The fiscal deficit was at 18.2% of the annual budget target during the quarter.EY said the renewed push on capital expenditure should help sustain demand and strengthen the prospects for real GDP growth.Inflation remains a key riskInflation, meanwhile, remains a key risk. Consumer price inflation was 4.4% in July, while wholesale price inflation stood at 9.8%, with mineral oils, food articles, metals, chemicals and fuels driving the increase.The higher WPI inflation could lift nominal GDP growth above the government’s budget assumption of 10.04%, according to EY. This could support revenue receipts and enable the government to continue its capital expenditure push while maintaining its fiscal deficit target.External sector faces headwindsThe external sector could prove more challenging. Higher energy costs and weaker global demand may weigh on exports, while India’s current account deficit could widen to 1.9% of GDP in FY27, based on OECD projections.EY said India could nevertheless improve its external position by reducing import dependence and increasing domestic value addition. A targeted approach covering 1,272 products could potentially replace around US$189 billion worth of imports.Alongside this, greater export promotion and domestic manufacturing could help reduce supply-side vulnerabilities over the medium term, the firm said.
