India’s growth story is a hot topic of discussion these days. How has one of the world’s largest economies managed to cushion the blow of the US-Iran war to still grow at 7.8%? What measures have helped the world’s sixth largest economy retain the tag of being the fastest growing major country?Global headwinds for the Indian economy began from the second half of 2025 when the Donald Trump administration’s reciprocal tariffs came into effect at 50%. The start of the year brought some relief with an 18% tariff being announced by Trump as part of trade negotiations with India.But, then began the Middle East conflict which exposed India’s dependence and vulnerability to the Middle East for key needs, especially its energy security.Yet, the economy has shown resilience in the face of multiple crises. GDP growth is just one aspect of the story. Foreign exchange reserves have recently hit an all-time high. GST collections – an important high frequency indicator – are robust. India’s exports have successfully diversified into new markets even as Free Trade Agreements load in the background to provide a supportive effect. The Index of Industrial Production (IIP) hit a multii-month high in June, before easing in July.
India’s domestic economy its biggest strength
The roots of the resilience lie in India’s domestic consumption-led growth story that provides an important cushion against global headwinds. And this consumption got an important stimulus from April 2025 from when income up to Rs 12 lakh became tax free. September 2025 brought in massive GST rate cuts which made household items more affordable.The combined power of more disposable income in hands of the common man and everyday items becoming cheaper provided an important buffer to the economy as it headed into the US-Iran war in 2026.DK Srivastava, Chief Policy Advisor, EY India notes that both these changes have helped sustain growth of private final consumption expenditure.Yet, the war required measures both from the government and the Reserve Bank of India (RBI) to curb ill effects.According to Arun Singh, Chief Economist, Dun & Bradstreet India, India has cushioned growth, and it has done so through monetary restraint and capital-account financing rather than demand-side stimulus.“Real GDP grew 7.8% in Q1 FY27 and the expansion was investment-led, with gross fixed investment rising 11.9%. That mix points to capacity creation,” he tells TOI.
Energy security
With a big chunk of its energy needs imported, for India the biggest vulnerability from the war came from disruption to crude oil, LPG, and LNG supplies – all of which come in big numbers from the Middle East and transit through the Strait of Hormuz.But despite facing an imminent supply crisis, the government worked to diversify further its energy procurement basket, effectively mitigating the constraints with minimum disruptions. Russian crude oil supplies hit record highs and LPG and LNG procurement was stepped up from the US.But supply issues were just one part of the story. Crude oil prices globally rose to beyond $120 per barrel, putting pressure on oil marketing companies to raise petrol and diesel prices. To begin with, the government absorbed the oil price shock by reducing excise duties on both fuels, in effect shielding consumers from the impact of higher rates. However, eventually retail rates of petrol and diesel were raised, though the government said that that the hike was much lower than what most major economies around the world had seen.India’s crude oil import bill hit a record $49.7 billion in Q1, up around 61% year-on-year, even as import volumes fell roughly 3.4% to about 60.5 million tonnes. This was a pure price effect, and it was the principal driver of the wider merchandise trade deficit of $86.1 billion.DK Srivastava, Chief Policy Advisor at EY India credits the energy supply management.“The most effective strategy that the government has deployed has been to manage India’s energy imports with no major supply disruption. It has done this through its diversification moves and continued insistence of importing oil from Russia, so there has been little to no adverse impact,” he tells TOI.Arun Singh, Chief Economist, Dun & Bradstreet India says that on the supply side, the government diversified crude sourcing and invoked the Essential Commodities Act to prioritise household fuel, which contained the physical supply risk.“The impact is largely contained, the Indian basket crude price fell from a peak of $114.5/bbl in April to $83.2 in June and $82.0 in July, before rising again to above $97 recently. The earlier price shock eased significantly through June and July, helping limit its impact on inflation and growth,” he says.“The recent rebound in crude prices warrants monitoring, but its full pass-through to domestic prices and activity will become clearer in the coming months. The main risk to the second half of FY27 would be a sustained increase in crude prices from current levels,” he cautions.
Forex Reserves At Record High
India has over the past few years built a credible foreign exchange reserves shield that is enough to cover around 11 months of exports. But the start of the conflict put further pressure on an already depreciating rupee and higher oil prices added to the import bill bringing forex reserves in focus. PM Narendra Modi urged citizens to spend wisely on things that required India to purchase more dollars – gold, foreign travel etc. The government also raised customs duty on gold and silver to discourage imports.But, simultaneously, the Reserve Bank of India worked to provide a medium-term durable cushion by attracting foreign inflows.The RBI encouraged Indian banks to attract foreign-currency deposits from NRIs by absorbing their currency-hedging costs, allowing banks to offer more attractive returns while reducing exchange-rate risk.The special scheme drew a record $136.38 billion, far above the RBI’s $80 billion estimate, with FCNR(B) deposits accounting for $127.23 billion. The bumper inflows strengthened India’s forex reserves and supported the rupee.According to Arun Singh, the FCNR(B) swap facility of RBI made the real difference.It mobilised $127.2 billion, close to five times the roughly $26 billion raised during the 2013 taper-tantrum episode.This lifted foreign exchange reserves to a record $740.80 billion, above the pre-conflict peak and equivalent to about 11 months of import cover.“Crucially, these are three-to-five-year foreign-currency deposits rather than volatile portfolio flows, so they funded the external gap directly, which is why the RBI could close the window early on 31 August,” Singh explains.“The FCNR-driven reserve build converted a potentially disorderly currency adjustment into a managed one,” he adds.Other measures played a supporting role. The RBI intervened directly in the foreign exchange market across spot, forwards and non-deliverable forward segments to contain volatility, as confirmed in its own annual report, though this drew down reserves until the swap facility took over.
Inflation in RBI’s Target Range
Prices are indeed rising and people are feeling the pinch as the Middle East crisis raises input costs and El Nino disrupts crop yield. But even so, the retail inflation is within RBI’s target range of 2-6%.Consumer Price Index (CPI) inflation in July hit a 19-month high of 4.45%. Wholesale Price Index (WPI) inflation is nearing double digits. Yet the pass through of higher input cost pressures is delayed.RBI has actually lowered its inflation target for the whole year, believing that inflationary pressures may ease going forward.“The MPC noted that headline CPI inflation edged up above the target, as expected. The realised inflation for Q1, however, remained marginally lower than projections reflecting limited pass-through of cost pressures. The higher inflation is mostly on account of fuel and food with little signs of generalisation of price pressures so far,” RBI governor Sanjay Malhotra said in his monetary policy statement in early August.“Going forward, El Niño’s impact on temporal and spatial rainfall distribution continues to remain a major risk, although proactive supply management and adequate stock of foodgrains should provide comfort. After considering all factors, CPI inflation for 2026-27 is projected to be 5.0 per cent with Q2 at 4.7 per cent; Q3 at 5.9 per cent; and Q4 at 5.5 per cent,” he added.
Is Growth Momentum Sustainable?
While economic indicators have so far maintained resilience, the US-Iran war is not over. Will the Indian economy be able to hold strong?India’s growth story still faces headwinds as the Middle East conflict persists and the Trump administration’s trade, tariff, and sanctions policy remains uncertain. But experts say that even as economic growth may see a marginal dip going forward, the medium-term story is firmly in place.Arun Singh strikes a note of caution. “The strength is real, but it is concentrated, and the honest reading is that the aggregates overstate the breadth. The topline is not in doubt: GDP grew 7.8%, gross GST collections rose 14.8% in August, and cumulative exports rose 13.2% to $ 316.4 billion for April to July,” he says.The composition is where caution lies, he warns.GST growth was led by imports, which rose 29% against just 9.3% for domestic revenue, and net collections grew only 8.3% after refunds. Auto registrations continued to grow on a year-on-year basis in August, although total registrations declined 7.2% month-on-month.Within services, financial, real estate and professional services grew fastest at 12.1%, pointing to an urban, asset-linked recovery.And on the external side, a $9.6 billion portfolio outflow against a $1.6 billion inflow a year earlier shows the capital account was held up by stable deposits, not returning risk appetite.“This is a strong but narrow recovery, not a broad-based one. Headline growth, exports and revenue are firm, while rural demand, mass-market consumption and genuine risk-capital inflows remain the weaker segments. The data is consistent with a two-speed economy, expanding faster at the top than at the base,” he adds.DK Srivastava of EY India sees headwinds and continued uncertainty posing risks.“There are still some lingering critical uncertainties for the immediate growth outlook. With the Strait of Hormuz expected to be blocked for some time now, Russian oil will continue to hold significance. The BRICS Summit may be important for local currency trade push between partners, but which may in turn invite some counter measures from the US,” he tells TOI.The GDP growth is expected to drop in the coming quarters but will still easily hold above 7% for the whole year, he believes.But, the expert sees resilience and medium-term growth prospects.“The Indian economy is in an extremely resilient position today. In certain sectors we are showing global leadership; be it pharmaceuticals, refining, and now even defence exports are making a mark. It is becoming increasingly difficult to displace Indian exporters,” says Srivastava.“Also, the MSME and startup ecosystem is rising in a big way, making very good products. The ecosystem is very robust and in a year or two the outcomes will be tangible. In short, the medium-term growth story of India remains intact,” he concludes.
