Domestic and international observers acknowledge India’s medium-term economic prospects. FY27 is shaping up to be one of the strongest years for economic activity since FY19, at least according to high-frequency data. Policy actions during FY26 have driven this momentum and laid a foundation for growth.
An illustration is public capital expenditure. After a slowdown in FY25, government capex rebounded in FY26. Year-to-date, capital expenditure is 25 percent higher than the period last year, while revenue expenditure has grown by less than 2 percent. This divergence highlights the government’s preference for investment-led growth, prioritising projects with financial returns, such as urban mobility, highways, airports, shipyards, and port infrastructure. The expansion of operational metro rail networks, the pace of highway construction, capacity additions at airports, and improvements in turnaround times at major seaports are documented.
In contrast, revenue expenditure—comprising subsidies and welfare spending—has been restrained. While such spending delivers societal returns, these benefits materialise over a longer horizon. For now, the government prioritises the creation of return-generating assets to revive economic momentum, even if early gains accrue unevenly across sections of the population.
It’s a bet. India’s growth strategy needs a ‘dual engine’ approach—capex for immediate momentum, social investment for long-term inclusivity. The external environment and India’s capital supply make this challenging. Elevated interest rates and interest payments could burden the exchequer, manifesting in vicious cycles that impact growth. Yet this shift may be pragmatic, but only if it is paired with an assurance. Societal and developmental expenditure must scale up once global conditions stabilise and fiscal space improves for a government operating under a perennial deficit. There is a risk of entrenching a K-shaped growth trajectory. Large sections of the population—particularly in Aspirational Districts and parts of eastern India—may remain excluded from the gains of growth.
A comparative assessment of macroeconomic indicators over the past year underscores the economy’s resilience. Retail inflation has declined by 390 basis points, driven by a correction in food prices, which have fallen by over 1,000 basis points since December 2024. This moderation has not come at the expense of farm incomes, as prices had risen from an exceptionally high base; annualised price growth for farm output has remained buoyant at 5 percent or higher.
Urban consumption sentiment has staged a recovery after a prolonged slowdown. The downturn began even before the pandemic in 2019. The Reserve Bank of India’s Consumer Confidence Index—which captures households’ willingness to spend—is now at a six-year high. This improvement is reflected in indicators of discretionary spending, such as passenger vehicle sales. Demand for entry-level cars has revived, and Bollywood box-office collections have reached a three-year high so far in FY26.
Consumption remains a pillar of India’s growth model, accounting for 60 percent of the national income. India’s domestic consumption base has historically acted as an economic ‘iron dome’ during global stress. This resilience was seen during the Asian Financial Crisis, the Global Financial Crisis or the taper tantrum. That buffer appears active again, even as global trade dynamics shift.
The blemish in an otherwise resilient macro backdrop has been the depreciation of the Indian rupee against the US dollar. This has occurred despite record-high foreign exchange reserves and a comfortable current account position. At this point, geopolitical considerations seem to drive the rupee’s weakness more than economic fundamentals.
The rupee could regain some lost ground once a trade agreement with the United States materialises. Foreign investors may also regain confidence in Indian markets. Foreign investor risk appetite towards India appears constrained by strains in India-US relations. A trade deal could resolve this uncertainty.
The Finance Minister will present her ninth consecutive Union Budget against this backdrop. Like recent budgets, this one may prioritise public capex while trying to rein in revenue expenditure to control the fiscal deficit. Reducing public debt as a share of GDP is a constitutional responsibility, with positive spillovers for private investment and access to cheaper capital. India’s sovereign rating upgrade from BBB- to BBB earlier in FY26 is conditional on sustained fiscal consolidation—especially as major economies, including the US, face rating pressures due to rising debt levels.
Emphasis on public capex in FY27 could catalyse the recovery in private investment that began in mid-FY26, supporting job creation—particularly in manufacturing sectors capable of absorbing India’s semi-skilled workforce. By my estimates, domestic private investment announcements rose by 25 percent year-on-year in FY26, with nearly ₹5 lakh crore worth of stalled projects recommissioned, compared to ₹2 lakh crore in the previous year. FY27 could carry forward this corporate confidence, especially as domestic demand continues to strengthen.
FY27 could mark a shift towards broader regulatory easing aimed at lowering capital costs and stimulating private investment. Large-ticket consumer sectors—such as automobiles and housing—are likely to benefit as employment conditions improve and household cash flows strengthen. Gold prices may not see a correction in the near term, at least until the US mid-term elections.
To conclude, I align with the policy strategy of empowering corporate India. Catalysts include public capital expenditure, production-linked incentives, MSME credit guarantees and regulatory easing. A healthy private sector is needed to generate the scale of employment required for India to transition into a middle-income economy.
Leveraging India’s demographic dividend is the need of the hour. While the country rightly takes pride in its large youth population—comparable to the entire US population—it also faces one of the highest levels of youth unemployment. This challenge has intensified each year. Investments in social development will yield a more productive workforce over the next decade or two. Still, the immediate imperative for a capital-deficient economy like India is job creation. Policies that accelerate private investment and employment generation must take precedence today, while longer-term social outcomes can continue to be built in parallel.
Debopam Chaudhuri | Chief Economist, Piramal Enterprises
(Views are personal)