India’s economic journey remains one of resilience, dynamism, and sustained progress. Even amid global uncertainties and a brief post-election slowdown, the Indian economy has demonstrated remarkable stability and the ability to rebound quickly, driven by sound macroeconomic fundamentals, supportive policy measures, and growing investor confidence.
The fiscal position continues to be managed prudently. The fiscal deficit for FY25 (April 24 – March 25) stood at 4.8% of GDP, and the government is targeting a reduced 4.4% in FY26 (April 25-March 26), reflecting a careful balance between fiscal discipline and growth. On the external front, the current account deficit narrowed to 0.6% of GDP in FY25, improving from 0.7% in FY24, aided by a better trade balance and stable remittances.
Inflation, a key macro concern globally, has remained well contained in India. Consumer Price Index (CPI) inflation for May 2025 came in at just 2.82% well below the Reserve Bank of India’s (RBI) 4% target. This disinflationary trend is not only supporting real household incomes but also creating headroom for monetary easing, helping lower the cost of borrowing across the economy.
India’s household leverage is also relatively low, providing further strength to the macro backdrop. With household debt at just 42% of GDP well below most emerging market averages the country retains significant headroom for credit-driven consumption growth as interest rates fall and consumer sentiment improves.
Following the general elections in May 2024, the economy experienced a short but notable mid-cycle slowdown. This period was marked by a temporary pullback in government spending and tighter consumer credit, particularly in urban areas. However, this phase bottomed out by November 2024, with a sharp rebound driven by renewed public expenditure and easing credit conditions. In FY26, this recovery has gained pace. Government capital expenditure in the first two months of the fiscal year has grown an impressive 55% year-on-year, reflecting strong intent to drive infrastructure-led growth.
The RBI, in response to the disinflationary environment, has been proactive in its monetary easing. A 25-basis point rate cut in February 2025 was followed by another in April and a more aggressive 50 basis point cut in June, marking a cumulative 100 basis point reduction in policy rates. At the same time, the central bank has relaxed lending norms for unsecured and gold loans to stimulate credit flow to consumers and small businesses. These moves have helped ease financial conditions and support domestic demand.
The fiscal side has also stepped in to boost household consumption. The government’s cut in personal income taxes, effective from the current financial year, is expected to put approximately $15 billion directly into the hands of consumers. This measure is likely to provide a substantial boost to private consumption, one of the core engines of GDP growth.
With these combined policy efforts, the economic outlook for FY26 appears significantly brighter. GDP growth is projected in the 6.5% to 7% range, and this improved momentum is already translating into stronger corporate performance. After a modest 7-8% earnings growth in FY25, FY26 is expected to deliver a meaningful acceleration to the low- to mid-teens. The March 2025 quarter has already shown signs of this trend, indicating that the earnings cycle has turned decisively upward.
Equity markets have responded positively. Since the lows recorded on March 6, the MSCI India Index has rallied 16%, reflecting investor optimism around improving growth and earnings visibility. While valuations have moved higher top 100 companies now trade at around one standard deviation above their 10-year average market levels remain supported by improving fundamentals and a more favourable interest rate environment.
India also appears relatively insulated from some of the global headwinds, including potential protectionist measures such as new U.S. tariffs. The country maintains a modest $35 billion trade deficit with the U.S., and roughly 25% of this is accounted for by generic pharmaceutical exports a segment less likely to be impacted by tariff actions. Moreover, India is expected to finalize a trade agreement with the U.S. soon, potentially ahead of the July 9 deadline, which could further support export growth and strengthen bilateral trade ties.
Looking ahead, the stage is set for a multi-year growth cycle. With macroeconomic stability, strong policy support, robust domestic demand, and recovering corporate profitability, India is poised to deliver sustainable earnings growth in the low- to mid-teens over the next three to four years. As inflation remains benign and interest rates ease further, the investment environment is expected to become even more favourable.
India’s growth story is no longer one of potential alone, it is now backed by performance, policy credibility, and structural strength. With the right mix of fiscal and monetary tools, and growing global investor interest, India remains one of the most compelling economic stories of the decade.
By Murali Yerram, senior vice-president and portfolio manager of the Franklin Templeton India Fund
