'Sustaining growth will require...': Finance Ministry warns of geopolitical, supply-chain risks; projects 7.3% Q2 growth

The Finance Ministry expects India's real economic growth to moderate to 7.3% in the September quarter of FY27, after it increased by 7.8% in the June quarter, even as it warned of supply-chain disruptions and tighter global financial conditions posing risks to the economy.

"Growth momentum has extended into Q2 FY27, though at a more measured pace. Geopolitical and geoeconomic uncertainty mean that India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter. That is the challenge for policymakers," the ministry said in its latest Monthly Economic Review for September.

The ministry anticipates a 7.3% real GDP growth in Q2 FY27 after it grew 7.8% in the first quarter.

The ministry said that most high-frequency indicators are pointing to continued economic activity in the early part of the second quarter. It added that monsoon conditions had been more favourable than earlier anticipated, with kharif sowing close to last year's levels across several crops.

"This supports the outlook for agricultural output and rural demand, although rabi prospects will require monitoring," the ministry said.

Industry activity remain resilient

Industrial activity has also remained resilient. Real Industry GVA grew 7.7% in Q1 FY27, led by 9.2% growth in manufacturing. More recent indicators showed IIP growing 6.7% year-on-year in July, while the Index of Core Industries expanded 4.8% and the manufacturing PMI stood at 52.8 in August.

The ministry flagged that despite this external risks like geopolitical tensions and growing weaponisation of supply chains persist.

"Nevertheless, external risks persist, with renewed geopolitical tensions and the growing weaponisation of supply chains, keeping energy prices volatile, tightening global financial conditions, and disrupting trade routes. Sustaining growth will therefore require preserving macroeconomic stability and strengthening economic resilience," it added.

Inflation risk from supply shock

The finance ministry's report also flagged inflation risks arising from supply shocks. It said a strong El Nino could pose risks to the upcoming rabi crop through heat stress and reduced soil moisture, although a positive Indian Ocean Dipole could partially offset these effects. Geopolitical tensions and elevated crude oil prices could add to imported inflation pressures, particularly amid the US Federal Reserve's 25-basis-point rate hike in September.

The ministry said higher interest rates in developed economies could spill over into domestic bond yields and slow cross-border capital flows, as investors may prefer to remain invested in their domestic markets amid heightened global uncertainty.

It also urged sustained, high-quality and consistent decision-making to reassure investors, arguing that India needs to become more competition-friendly rather than merely business-friendly. "Only a competitive economy will become a successful, innovative, and manufacturing economy," the report said.

Exports provide some cushion

Despite the external risks, India's trade outlook remained strong. Total exports of goods and services rose 15.5% year-on-year to $399.3 billion during April-August FY27, bringing the country close to the $400-billion mark in the first five months of the financial year.

"That is a very strong confirmation that India's trade agreements are providing impetus to India's exports. It can only get better from here, with more trade agreements on the anvil," it said.

In August, merchandise exports rose 26.1% to $43.8 billion, while services exports increased 24.6% to $38.9 billion. The services trade surplus of $17.5 billion offset 65% of the merchandise trade deficit, helping narrow the overall trade deficit.