The Ministry of Finance stated in its latest Monthly Economic Review on Thursday that India cannot take its growth for granted amid escalating geopolitical polarization. The government emphasized the need to adopt sustainable, high-quality, and sufficiently fast decisions to reassure investors while making the economy more 'competitive' rather than merely 'business-friendly.'
The review, prepared by staff of the Department of Economic Affairs, noted the risk of slowing cross-border capital flows due to high global interest rates. Officials stressed that consistently maintaining high quality, consistency, and timeliness in decision-making will help gain investor confidence. They added that 'it is more important for India to work towards having a competitive economy, not just a business-friendly one.'
According to officials, only a competitive economy can become successful, innovative, and manufacturing-oriented. Key to building a competitive Indian economy are improved governance and strengthening state capacity.
This warning came as foreign investors began showing caution regarding Indian stocks. Foreign Portfolio Investors (FPIs) are withdrawing funds amidst rising global bond yields, tariff pressures, and the lack of domestic artificial intelligence (AI) projects.
Ministry officials expressed hope that investors will eventually appreciate India's resilience and sustained high growth post-Covid. They noted that 'as some of these clouds inevitably dissipate, India's domestic growth potential will attract deserved attention from investors.'
The review forecasts economic growth of 7.3 percent for the September quarter of FY27, following a confident expansion of 7.8 percent in the June quarter. The review indicated that the growth momentum continued in the second quarter of FY27, albeit at a more moderate pace. Geopolitical and geo-economic uncertainty means India cannot relax after post-Covid growth; this growth must be achieved every quarter, and this is a task for policymakers.
Staff reported that most high-frequency indicators point to continued economic activity at the beginning of the second quarter. Favorable monsoon conditions, which were better than previously expected, have brought the sowing of kharif crops close to last year's levels for several crops. This supports the forecast for agricultural production and rural demand, although Rabi prospects require monitoring.
Nevertheless, the review insists that sustaining growth will require maintaining macroeconomic stability and strengthening economic resilience. It also warned that supply-shock-induced inflation will limit economic growth.
It was noted that sharp increases in interest rates in developed countries will affect domestic bond yields. Furthermore, this will slow cross-border capital flows, as higher interest rates will prompt many investors to remain invested in domestic markets amid pervasive and growing global uncertainty.
Officials highlighted the risks of rising inflation associated with a combination of climatic, geopolitical, and monetary challenges. The strong El Niño phenomenon could pose risks to the upcoming Rabi harvest due to heat stress and reduced soil moisture, although the positive Indian Ocean Dipole (IOD) may partially offset these effects. Geopolitical tensions and rising crude oil prices could also increase imported inflation pressure, especially against the backdrop of the US Federal Reserve raising rates by 25 basis points in September.
However, it was stated that recent open market operations by the Reserve Bank of India to absorb excess systemic liquidity may help maintain balanced financial conditions and curb excessive demand. At the same time, festive demand and higher raw material costs may add some short-term price pressure. Nevertheless, proactive supply-side and market measures by the Government can help contain these growth risks and provide a buffer against temporary price pressures.
Citing strong exports of goods and services, the review reported that at the current pace, India's total exports for the full fiscal year could approach $1 trillion, nearly $400 billion in the first five months of the year. This is very strong confirmation that Indian trade agreements are stimulating its exports. It was noted that the situation could only improve due to new trade agreements currently under discussion.
In August, the services trade surplus compensated for 65 percent of the merchandise trade deficit, thereby reducing the overall trade deficit. Ministry officials stated that trade relations with the US remain 'unresolved' following the passage of the Graham Act by Congress and its presidential approval. This act grants the President the authority to impose tariffs of up to 100 percent on countries purchasing Russian crude oil.
