India's Economy Navigates Global Headwinds with Robust Domestic Demand in Q2 FY26

India’s Economic Resilience: A Mid-FY26 Analysis

New Delhi, October 28, 2025 – India’s economy continues to demonstrate remarkable resilience, with preliminary estimates for the second quarter of Fiscal Year 2026 (July-September 2025) indicating sustained growth driven largely by robust domestic demand and strategic government spending on infrastructure. Despite lingering global economic uncertainties and inflationary pressures, the nation’s GDP growth is projected to remain strong, positioning India as a key driver of global economic expansion.

Recent data suggests that private consumption, a cornerstone of India’s economy, has remained buoyant, further boosted by the onset of the festive season. This domestic vitality is offsetting some of the headwinds emanating from a cautious global trade environment and fluctuating commodity prices. The Reserve Bank of India (RBI), in its latest monetary policy review earlier this month, maintained its accommodative stance while reiterating its commitment to inflation targeting, signaling a watchful approach to balancing growth and price stability.

Key Growth Drivers

• Robust Domestic Consumption: Urban and rural demand, though uneven, continues to underpin economic activity. E-commerce platforms reported record sales during early festive events, reflecting consumer confidence. Services sectors, particularly financial services, retail, and tourism, have seen healthy recovery and expansion.
• Government Capital Expenditure: The Union government’s continued focus on infrastructure development through substantial capital outlay remains a significant multiplier. Projects in roads, railways, ports, and renewable energy are progressing at an accelerated pace, creating jobs and boosting demand for allied industries like steel, cement, and construction equipment.
• Manufacturing Push: ‘Make in India’ and Production Linked Incentive (PLI) schemes are showing tangible results. Sectors such as electronics manufacturing, automotive components, and pharmaceuticals are attracting significant domestic and foreign investment. The government’s push for advanced manufacturing and green technologies is beginning to yield dividends, enhancing India’s position in global supply chains.
• Digital Transformation: India’s digital public infrastructure, particularly the Unified Payments Interface (UPI), continues to facilitate seamless digital transactions, integrating more people into the formal economy. Fintech innovation, e-health, and e-governance services are expanding, driving efficiency and inclusivity.

Challenges and Headwinds

While the growth narrative is strong, challenges persist:

• Inflationary Pressures: Food inflation, particularly for perishables and certain cereals, remains a concern, impacted by monsoon variability and global supply chain disruptions. While core inflation shows signs of moderation, headline inflation requires careful monitoring by the RBI.
• Global Slowdown & Export Weakness: A sluggish global economy and geopolitical tensions are impacting India’s export growth. Merchandise exports have faced headwinds, although services exports, particularly IT and BPO, continue to perform strongly, providing a crucial foreign exchange buffer.
• Job Creation: While overall economic activity is picking up, the pace of formal job creation, especially for the young demographic, needs to accelerate further. The government is focused on skill development initiatives and promoting MSMEs to address this.
• Private Investment: Despite positive indicators, broad-based private capital expenditure, beyond specific PLI-driven sectors, is yet to see a definitive take-off. Investor sentiment, while positive, remains cautious about global economic volatility.

Policy Outlook

The government is expected to continue its twin strategy of fiscal consolidation alongside targeted capital expenditure. Efforts to improve the ease of doing business, streamline regulations, and attract Foreign Direct Investment (FDI) remain central to its economic agenda. The RBI is anticipated to maintain its data-dependent approach, balancing price stability with growth objectives, with future rate actions contingent on inflation trajectory and global cues.

Overall, India’s economic journey in Q2 FY26 reflects a nation building on its domestic strengths to withstand external shocks. The coming months will be crucial in observing the sustained impact of policy measures, global commodity prices, and the monsoon’s final assessment on agricultural output, all of which will shape the trajectory towards the full fiscal year’s performance.