The revision follows India’s stronger-than-expected gross domestic product (GDP) growth of 7.8% in the June quarter, driven by robust investment demand, resilient consumption, and solid growth in the manufacturing and services sectors.
The economy also benefited from lower-than-expected supply disruptions, sustained capital inflows, and limited pass-through of higher input costs to consumer prices, which helped cushion the impacts of the Middle East conflict, said the multilateral lender.
Growth forecast for FY28, however, is lowered to 7.1% from 7.3%, reflecting a stronger GDP base.
“Despite supply disruptions and high commodity prices, India’s economy continues to demonstrate resilience, supported by strong infrastructure spending and growth-supporting fiscal and monetary policies,” said Mio Oka, ADB country director for India.
She added continued strength in the services sector, including AI-related investments, alongside improvements in agricultural productivity and steady manufacturing growth, would help sustain India’s growth momentum.
The report identified prolonged geopolitical uncertainty and El Nino-related disruptions as key risks to the outlook. “These risks may lower agricultural output and raise industrial input costs. However, services and construction are likely to remain robust in FY27 and FY28,” it said.Domestic demand is expected to remain the main engine of growth in FY27 and FY28, supported by robust tax collections, low interest rates, rising household incomes, and the anticipated revision of government salaries and pensions in FY28.
Inflation
The ADB lowered its FY27 inflation forecast to 5% from 5.2%, citing a more gradual increase than previously anticipated.
Inflation is expected to ease to 4% in FY28, unchanged from July, as energy prices are expected to moderate and agricultural supplies recover under the assumption of a normal monsoon.
While inflation is expected to remain within the Reserve Bank of India’s (RBI) target range, the central bank may consider raising the repo rate if inflationary pressures intensify.
Retail inflation rose to 4.8% in August from 4.5% in July. The RBI targets inflation at 4%, with a tolerance band of two percentage points on either side.
Strong public spending remains a key driver of growth. Central government capital expenditure rose 29.9% in the first quarter of FY27 and is on track to meet its 11.5% annual target.
Private investment is also expected to pick up, supported by government measures to improve the investment climate, including better logistics infrastructure, regulatory reforms, and a strong pipeline of projects, according to the ADB.
Despite higher spending on fertiliser subsidies and fuel tax cuts, the fiscal deficit is expected to remain around 4.3% of GDP, supported by robust direct tax revenues and additional receipts from oil export taxes and duties on precious metals.