EY Economy Watch: India Macro-Fiscal Performance June 2026

 As of June 2026, India's economic growth and output demonstrate a robust post-COVID recovery characterized by strong domestic demand, though performance is expected to face short-term headwinds from global and environmental factors.

FY26 Performance and Quarterly Trends

India's real GDP grew by 7.7% in FY26, an increase from 7.1% in FY25. This performance was underpinned by significant output across various sectors:

• Gross Value Added (GVA): The overall real GVA grew by 7.9% in FY26. Exceptional growth was seen in manufacturing (10.7%), trade and transport services (11.0%), and financial and real estate services (10.4%).
• 4QFY26 Moderation: Growth in the final quarter of FY26 moderated marginally to 7.8% (GDP) and 7.9% (GVA) from 8.0% each in the previous quarter.
• Demand Drivers: Growth was largely domestic-led, with private final consumption expenditure (PFCE) growing at 7.7% and gross fixed capital formation (GFCF) at 8.2% in FY26. Notably, GFCF surged to 10.8% in 4QFY26.

High-Frequency Indicators of Output

Data from early FY27 indicates continued resilience in private sector activity:

• Purchasing Managers' Index (PMI): In May 2026, manufacturing PMI reached a three-month high of 55.0, and services PMI hit a six-month high of 59.8.
• Index of Industrial Production (IIP): Using a new 2022-23 base series released in June 2026, IIP growth reached a four-month high of 4.9% in April 2026. This new series incorporates emerging products like vaccines and aircraft parts while expanding coverage to include gas and water supply.
• Index of Aggregate Demand (IAD): This index, which combines demand conditions across agriculture, manufacturing, and services, posted a stable growth of 5.4% in April 2026.

Projections and Risks for FY27

While FY26 showed impressive momentum, a short-term setback is anticipated in FY27 due to exogenous shocks.

• Growth Projections: Estimates for FY27 real GDP growth range from 6.3% (OECD) to 6.6-6.8% (EY estimate).
• Primary Risks:
  • Geopolitical Stress: The West Asian crisis has created supply bottlenecks and price shocks for crude oil, gas, and fertilizers.
  • Environmental Factors: A deficiency in monsoon rainfall due to El Niño—estimated at 90% of the long-period average—poses a risk to agricultural output.
• Nominal Growth: Nominal GDP growth is expected to be higher in FY27 at approximately 12.5%. This is driven by an expected rise in the implicit price deflator (IPD) to 5.4%, up from just 1.1% in FY26.

Wider Macro-Fiscal Context

India's output is becoming more energy-efficient; the energy intensity of GDP has fallen over time, which supports long-term growth sustainability. On the fiscal front, the Government of India met its FY26 fiscal deficit target of 4.4% of GDP. However, there was a substantive compression in capital expenditure growth, which slowed to just 1.6% in FY26 compared to a multi-year average of 25.9%. Restoring this growth to the budgeted 11.5% for FY27 is considered desirable for maintaining long-term output momentum.

As of June 2026, India's inflation dynamics are characterized by rising supply-side pressures from food and fuel, even as core inflation remains relatively contained. This surge in price levels is a critical component of the broader macro-fiscal landscape, as it is expected to significantly drive nominal growth in FY27.

Consumer Price Index (CPI) Dynamics

Headline CPI inflation increased to 3.9% in May 2026 from 3.5% in April 2026. While this remains below the RBI’s medium-term target of 4%, the trajectory is being pushed upward by specific sectors:

• Food Inflation: This rose for the fourth consecutive month to 4.5% in May, driven primarily by vegetables and pulses (up to 4.3% from 2.3% in April) due to weather-related supply disruptions and sub-normal monsoon trends.
• Fuel and Transportation: Transportation services inflation rose to 1.8% in May, mirroring high global crude prices. Airfares saw a significant jump of 15.1% during the month.
• Personal Care: This segment saw persistently high inflation at 18.5%, largely due to strong global bullion prices; silver jewelry inflation reached a three-month high of 155.2% as investors sought financial hedging.
• Core Inflation: In contrast, inflation moderated in categories like health, education, and communication, suggesting that underlying core demand remains soft.

Wholesale Price Index (WPI) Surges

Using the new 2022-23 base series, headline WPI inflation surged to 9.7% in May 2026 from 8.3% in April. The pressures here are more broad-based:

• Fuel and Power: This remains the dominant contributor, with inflation at 30.3% in May. Crude petroleum and natural gas inflation reached 61.5%, reflecting a strong pass-through of global energy market shocks.
• Manufactured Products: Inflation in this segment rose to 7.5%, indicating that input cost pressures are being transmitted to output prices.
• Core WPI: This reached 7.7%, its highest level since the start of the new series in April 2024, signaling that inflation is becoming generalized beyond just energy shocks.

Inflation in the Larger Macro-Fiscal Context

The interplay between inflation and output is a defining feature of the June 2026 performance:

• Impact on Nominal Growth: While real GDP growth is expected to moderate in FY27, nominal GDP growth is projected to rise to 12.5%. This is because the implicit price deflator (IPD)—which is derived from WPI and CPI—is estimated to jump to 5.4% in FY27 from just 1.1% in FY26.
• Fiscal Implications: Higher nominal growth is expected to help the Government of India contain fiscal pressures by boosting tax revenues, potentially allowing the government to meet its FY27 fiscal deficit target of 4.3%–4.4% of GDP despite higher subsidy requirements.
• Monetary Policy Stance: Facing a "dilemma" where price pressures might warrant a rate hike while slowing GDP growth might call for a cut, the RBI maintained the repo rate at 5.25% in June 2026 with a neutral stance.
• External Vulnerabilities: A significant portion of current inflation is "exogenously generated" by the West Asian crisis and its impact on the Strait of Hormuz. Projections for FY27 headline CPI inflation range from 4.5% (EY estimate) to 4.8% (OECD) and 5.1% (RBI), with much depending on the normalization of global oil markets.

In June 2026, India's fiscal performance is characterized by successful deficit management in the face of slowing tax revenue growth and a significant compression in capital expenditure.

FY26 Fiscal Achievement

The Government of India (GoI) successfully met its key fiscal targets for the fiscal year ending March 2026:

• Fiscal Deficit: Reached the target of 4.4% of GDP, down in magnitude to INR 15.2 lakh crore from INR 15.8 lakh crore in the previous year.
• Revenue Deficit: Met the target of 1.5% of GDP.
• Index of Macro Imbalance: Despite meeting targets, the Index of Macro Imbalance increased to 44.5 in 4QFY26 (from 1.2 in 3QFY26), primarily because the fiscal deficit-to-GDP ratio for that specific quarter rose to 7.0%, well above the 3% benchmark.

Revenue Dynamics

Fiscal stability in FY26 was supported by non-tax windfalls rather than tax buoyancy:

• Gross Tax Revenues (GTR): GTR grew by only 6.0% in FY26, falling short of the revised estimate (RE) of 7.4%. Tax buoyancy stood at a low 0.7.
• Direct vs. Indirect Taxes: Direct tax growth slowed significantly to 5.2%, with personal income tax (PIT) showing near-zero growth due to rate rationalization measures. Indirect taxes grew by 7.2%, though GST growth moderated to 4% following rate reductions in late 2025.
• Non-Debt Buffers: The shortfall in tax revenue was offset by strong growth in non-tax revenues (26.3%) and non-debt capital receipts, which both exceeded revised estimates.
• Early FY27 Trends: Data for April 2026 shows a contraction in GTR of (-)1.9%, largely driven by a (-)17.2% drop in GST revenues.

Expenditure Trends and the CapEx Slowdown

A notable feature of the FY26 fiscal performance was a shift in spending priorities:

• Overall Spending: Total expenditure grew by 5.4%.
• Revenue vs. Capital Expenditure: Revenue expenditure (daily operational costs) grew by 6.5%, but capital expenditure (CapEx) growth slowed drastically to just 1.6%. This is a sharp departure from the multi-year average growth of 25.9% seen between FY22 and FY25.
• Desired Recovery: The sources indicate it is "desirable" to restore CapEx growth to the budgeted 11.5% for FY27 to maintain long-term output momentum.

Fiscal Outlook for FY27

The fiscal strategy for FY27 relies heavily on inflation-driven nominal growth to manage pressures:

• Nominal Growth Impact: While real GDP growth may slow, nominal GDP is projected to grow by 12.5% due to higher expected inflation (IPD at 5.4%). This higher nominal base is expected to help contain fiscal pressures by boosting the absolute value of tax collections.
• Subsidy Risk: On the expenditure side, the West Asian crisis and supply shocks mean subsidies may be higher than budgeted.
• Deficit Projections: The GoI is expected to either realize its FY27 budgeted fiscal deficit of 4.3% of GDP or marginally exceed it at 4.4%.

India’s petroleum economy in June 2026 is defined by a dichotomy between high strategic vulnerability due to import dependence and industrial strength in refining capacity, both of which significantly influence the nation's broader macro-fiscal performance.

1. Strategic Vulnerabilities: Import Dependence and Falling Production

India’s dependence on imported crude oil has increased in a "secular way," rising from 55% in FY1999 to more than 90% in FY26. This vulnerability is compounded by two factors:

• Declining Domestic Output: Volume of domestic crude production peaked at 35.9 million metric tons (MMT) in FY12 but has steadily eased to 26.0 MMT in FY26.
• Rising Consumption: Domestic consumption of Petroleum Oil and Lubricants (PoL) products surged from 90.6 MMT in FY1999 to 243.2 MMT in FY26.

2. Industrial Strengths: Refining and Energy Efficiency

While crude sourcing is a weakness, India has built an impressive capacity to refine crude into petroleum products, which serves as a macroeconomic cushion.

• Refining Efficiency: There has been a 33% improvement in refining efficiency since FY1998, with the conversion ratio of crude to products reaching 1.27 in FY26. This capacity saves refining costs and allows India to diversify its crude sources.
• Energy Intensity: A positive long-term trend is the falling energy intensity of India's GDP. Growth in PoL consumption is generally lower than real GDP growth, suggesting that India’s output is becoming more energy-efficient over time.

3. Impact on Macro-Fiscal Performance

The petroleum sector is currently a primary driver of inflation and trade imbalances:

• Inflation Dynamics: High global crude prices—averaging US$100.4/bbl. in May 2026—have pushed wholesale fuel and power inflation to 30.3%. This energy-led shock is a major contributor to the surge in headline WPI inflation.
• Trade and Currency: The merchandise trade deficit remained wide at US$28.2 billion in May 2026, largely reflecting elevated crude prices. Increased oil imports were also a key factor in the Indian Rupee weakening to an average of INR 95.6/US$ in May 2026.
• Fiscal Pressures: While higher nominal growth (driven by fuel-led inflation) may boost tax revenues, the sources warn that subsidies for fuel and fertilizers may be higher than budgeted for FY27 due to the West Asian crisis.

4. Strategic Imperatives for FY27 and Beyond

The sources emphasize that India must prepare for "unanticipated shocks" by building strategic reserves.

• Reserve Shortfall: India’s strategic oil inventories (21 million barrels) suffice for only about five days of consumption, significantly lower than China (92 days) or Japan (77 days).
• Diversification: The sources recommend a multi-pronged strategy: augmenting refining capacity, exploiting more domestic crude, and accelerating the shift toward alternative energy sources, including nuclear and green options.

As of June 2026, India’s external sector is characterized by a structural dependence on energy imports and capital volatility, which are being successfully countered by unprecedented highs in service exports and remittances.

Current Account Balance (CAB) and Projections

India’s current account position has shown significant recent fluctuations:

• 4QFY26 Surplus: The current account turned into a surplus of 0.7% of GDP in the final quarter of FY26. This was a sharp improvement from the 1.5% deficit in 3QFY26, driven by a narrowing merchandise trade deficit and a substantial rise in net invisibles.
• FY26 Annual Deficit: On an annual basis, the Current Account Deficit (CAD) remained contained at 0.6% of GDP for FY26, unchanged from FY25.
• FY27 Outlook: Projections for FY27 vary based on global conditions. While the RBI’s Professional Forecasters estimate a deficit of 2.1% of GDP, the sources suggest that if global oil markets and the Strait of Hormuz normalize, the CAD could be limited to 1.5% of GDP.

The Role of "Invisibles"

A critical pillar of India’s external sector is the performance of "net invisibles," which reached an unprecedented high of 8.7% of GDP in 4QFY26.

• Services Surplus: Net services surplus rose to 5.8% of GDP, reflecting continued strength in global demand for Indian services.
• Remittances: Net transfers increased sharply to 4.0% of GDP in 4QFY26, the highest level since 4QFY10. This surge was likely driven by higher "precautionary remittances" from Gulf economies amidst regional instability.

Merchandise Trade Dynamics

Despite the surplus in services, the merchandise trade balance remains a point of pressure:

• Surge in Activity: In May 2026, merchandise exports and imports grew by 18.0% and 20.6%, respectively.
• Export Drivers: Growth was led by engineering goods (up 24.5%) and oil exports (up 54.9%), though the latter was largely price-driven. Electronics exports also maintained double-digit growth at 11.6%.
• Import Pressures: Crude imports surged by 53.8% in May 2026, reflecting elevated global energy prices (averaging US$100.4/bbl) and resilient domestic demand.
• Wide Deficit: The merchandise trade deficit remained wide at US$28.2 billion in May 2026.

Capital Flows and Currency Performance

India is navigating a complex environment regarding foreign investment and currency stability:

• FDI vs. FPI: In April 2026, net FDI inflows surged to US$6.6 billion (reaching a 68-month high for gross inflows), which helped offset heavy net FPI outflows of US$7.3 billion.
• Rupee Depreciation: The Indian Rupee weakened to an average of INR 95.6/US$ in May 2026. This depreciation is attributed to the widening trade deficit, capital outflows, and elevated US yields.
• Policy Response: To attract foreign capital and manage these pressures, the RBI announced measures in June 2026 to ease foreign access to government bonds and support banks in hedging currency risks.

Global Context and Resilience

The external sector's performance is deeply tied to the West Asian crisis. The sources note that India's ability to maintain a growth rate of 6.3% (OECD estimate) while global growth potentially slips to 2.1% in a "prolonged disruption" scenario highlights the country's underlying resilience to exogenously generated shocks. However, a speedy normalization of global crude supply remains the primary factor for restoring positive momentum to India’s external and overall growth prospects.

As of June 2026, India’s future outlook is characterized by a temporary moderation in growth due to global and environmental headwinds, even as the economy demonstrates significant underlying resilience to external shocks.

Economic Projections for FY27

While India achieved a robust 7.7% real GDP growth in FY26, a "short-term setback" is expected in FY27.

• Real Growth: Projections for FY27 real GDP growth range from 6.3% (OECD) to 6.6-6.8% (EY and World Bank estimates). Despite this moderation, India is forecasted to grow by more than double the global growth rate.
• Nominal Growth: A notable feature for FY27 is the likelihood of higher nominal GDP growth (estimated at 12.5%) compared to FY26. This is driven by a jump in the implicit price deflator (IPD) to 5.4%, resulting from higher expected WPI and CPI inflation.
• Fiscal and External Balance: The Government of India is expected to meet its fiscal deficit target of 4.3%-4.4% of GDP. The current account deficit (CAD) is projected to settle at 1.5% of GDP, provided the global oil market normalizes.

Key Downside Risks

The sources identify several critical risks that could derail this outlook:

• West Asian Crisis: This remains the primary exogenous risk, causing supply bottlenecks and price shocks in crude oil, gas, and fertilizers. A "prolonged disruption" scenario could see global growth slip to 2.1%, further sapping domestic demand.
• Environmental Factors: There is a significant risk to agricultural output due to an expected deficiency in monsoon rainfall (El Niño), which is estimated to be only 90% of the long-period average.
• Strategic Vulnerabilities: India’s dependence on imported crude has reached more than 90%, making the economy "strategically dependent" on global supply chains. Furthermore, India’s strategic oil inventories only suffice for about five days of consumption, which is significantly lower than other major economies like China (92 days) or Japan (77 days).
• Monetary Policy Dilemma: The RBI faces a difficult balance where inflationary pressures might warrant a rate hike, while slower growth might call for a rate reduction; consequently, it has maintained a neutral stance with the repo rate at 5.25% as of June 2026.

Long-Term Outlook and Strategy

The sources highlight several factors that support India's long-term "growth story":

• Energy Efficiency: The energy intensity of India's GDP has fallen over time, meaning the country can sustain higher output with lower relative levels of imported energy.
• Industrial Strength: India has built a massive refining capacity that provides a cushion against pressure on foreign exchange reserves and allows for the diversification of crude sources.
• Policy Recommendations: To minimize the impact of future shocks, the sources recommend building larger strategic reserves for crude oil, gas, and fertilizers once global prices normalize. Additionally, there is a call to accelerate the shift toward greener energy options and nuclear power.

Growth is expected to strengthen again in FY28, with the World Bank projecting a rebound to 7.2% as current global challenges gradually diminish.