The Consumption Engine: Domestic spending keeps the Indian economy resilient amid global uncertainty

INDIA SET A blistering pace of economic growth in the midst of global uncertainty as its economy grew at 7.7 per cent in 2025-26, the third succes­sive year in which it posted 7 per cent-plus growth. The global economy, in contrast, grew at less than half of India’s pace during these years. What makes these figures even more impressive is India’s performance in the last—fourth—quarter of the year. In March, the last month of the quarter, the country was buffeted with problems well beyond its control. In those three months the economy steamed ahead at 7.8 per cent even as barely a fraction of the hydrocarbon supplies required for daily consumption flowed through the choked Strait of Hormuz.

So far, there has been no let-up in economic activity, especially on the con­sumption side where data showed that private consumption grew at 7.7 per cent in 2026-27, almost two percentage points more than the previous two years. When seen together with sales of consumer goods and growth numbers for automobiles such as two-wheelers, there is little sign of distress in the economy.

In May, the ratings agency CRISIL noted that revenues of FMCG companies had grown at 8 per cent in 2025-26 and were expected to grow at 8-10 per cent in the current financial year. In March, two-wheeler sales grew at 18 per cent on a year-on-year basis. There is evidence that four-wheel vehicle sales, too, have kept growing at a smart pace. High sales volumes have kept up even after companies were forced to increase prices or, in the case of FMCG companies, reduce the size and weight of their products due to increases in the costs of production.

All this has not been costless. On June 9, ANI reported that the Centre has provided financial support amounting to ₹1.23 lakh crore to oil marketing companies (OMCs) to hold the price line of their products and offset their losses. This support was for the first 78 days of the conflict, roughly the period from the beginning of March to mid-May. Even after financial support and price in­creases in fuels, OMCs continue to bleed around ₹652 crore every day. Before these interventions by the government, the daily losses were to the tune of ₹1,000 crore.

More problematically, subsidies on fertilisers are likely to see a sharp increase. In 2026-27, the fertiliser subsidy was pegged at ₹1.77 lakh crore and was expected to see a reduction from the ₹1.86 lakh crore in 2025-26. Those calculations have gone awry now and ANI added that the fertiliser ministry has asked for a 100 per cent increase over the budgeted amount. This effectively means fertiliser subsidy will cross ₹3.5 lakh crore. When combined with the support to OMCs, the sums involved are substantially more than what had been budgeted for subsidies on these accounts.

The big question now is whether these large expenditures will have an impact on the fiscal deficit target in 2026-27. In the Budget for this year, the fiscal deficit target was set at 4.3 per cent of GDP, a tad below 4.4 per cent of GDP for 2025-26. Even if the government finds a way to somehow meet this target—which won’t be easy, given the circumstances—painful macroeconomic trade-offs are on the horizon even if we are not there yet. The most visible trade-offs are between meeting the fiscal deficit target and continuing to hold the price line for fuels and fertilisers. This trade-off is a prelude to a more serious one, between growth and inflation. At some point, the gov­ernment will have to reckon with the fact that as time passes with­out a resolution of the geopolitical issues, the sacrifice ratio—the quantum of growth that will need to be sacrificed for a percentage point reduction in inflation—will continue to rise. The government only has a finite capacity to cushion these external shocks.

THE RESERVE BANK OF INDIA’S (RBI) Monetary Policy Committee (MPC), which met from June 3 to 5, noted this trade-off in its statement. It said: “[R]etail fuel prices have been raised cumulatively by 7.4 per cent for petrol and 8.4 per cent for diesel. The increase implies a direct impact of about 36 basis points on headline inflation, which, along with second order ef­fects, would get reflected in Consumer Price Index (CPI) inflation in the coming months.”

The government’s caution in increasing fuel and fertiliser prices has a certain logic to it. It cannot allow a full pass-through of these prices as that would set in an inflationary spiral that would become difficult to manage. If that course is adopted, then RBI will have to impart some very bitter medicine in the year ahead. That has the potential to cause a very hard landing for the Indian economy. The strategy at the moment is to get to a soft landing. A part of growth momentum may be shaved off. That is necessary to ensure inflation does not get out of hand and the central bank does not have to take some tough steps.

Chief Economic Adviser (CEA) Anantha Nageswaran said as much in his remarks to a TV channel on June 9 when he cautioned that the growth outlook for 2026-27 was “clouded by uncertain­ties”. He went on to say that in February, “we were very confident about the growth rate being 7 to 7.4% for the current financial year. Obviously, that is going to be a very humongous task to get there. It will be likely in the range what the central bank [RBI] put out on Friday, 6.6% with downside risk.” Nageswaran’s caution was not pessimistic in nature. He added that once the conflict in West Asia came to an end and crude oil prices reverted to their natural level, India’s growth rate would bounce back to the 7 per cent-plus range, where it has been for the past many years.

This uncertainty has also been echoed by very different ob­servers and participants in the Indian economy. On June 5, RBI re­leased the latest edition of its survey of professional forecasters of macroeconomic trends. The survey was conducted in May and 40 forecasters were surveyed. The median growth rate for 2026-27 was pegged at 6.5 per cent, sharply down from the observed growth rate for 2025-26, shaving off 1.1 percentage points. The same panellists forecast growth for 2027-28 at 6.9 per cent. But in a world experienc­ing almost daily rounds of uncertainty, these estimates can go off the mark very quickly. Interestingly, RBI’s MPC also had a similar estimate for growth in 2026-27: 6.6 per cent. The MPC noted: “Pro­longed global supply chain disruptions, heightened volatility in global financial markets, and weather-related shocks continue to pose downside risks to the domestic growth outlook.”

RBI, even if it sounded a note of caution, chose to keep its policy rate unchanged and said, “Although risks of higher inflation have amplified, the MPC felt it would be prudent to wait for greater clarity to emerge. Accordingly, the MPC voted to keep the policy rate unchanged.” The MPC also said, “The underlying inflation pressures continue to remain benign at this juncture,” even as it noted the risk of higher inflation in the months ahead. Clearly, the central bank, along with the government, does not want to take any step that will hurt growth.

Further down, at the level of households, both in rural and ur­ban areas, consumer confidence is running low even as data sug­gests that actual consumption remains robust. This can be seen from the provisional estimates of GDP released on June 5 as well as the market for FMCG and other goods. In contrast, RBI’s Consumer Confidence Surveys (CCSs) reflect a state of heightened uncertain­ty among consumers. In the rural and urban editions of CCSs, the Current Situation Index (CSI), that compares perceptions from a year earlier to the current period and the Future Expectations Index (FEI) make for a sober reading. For both indices, consum­ers are surveyed their perceptions of five economic parameters. A reading below 100 is considered negative perception territory. Unsurprisingly, both indices dived from March this year. The CSI is negative in both rural and urban editions of the index. The FEI index remains in positive territory in both urban and rural India. There is a marginally higher feel to the FEI index in rural India than in the urban edition of the index.

These worries are natural in an uncertain environment. But there are good reasons for the resilience of the Indian economy. For starters, unlike many economies that have a thin ‘home market’, India generates a large part of demand for its products domestically. Private consumption remains the mainstay of the economy. As the latest data shows, consumption accounts for 55 per cent of its GDP. That is not all. The sustained increases in capital expenditure and the high level of investment continuing at 32 per cent-plus year after year are imparting sufficient mo­mentum to the economy. The result is that core strengths of the Indian economy remain intact even in the face of uncertainties.

A decade ago, it was thought there was a direct trade-off be­tween freebies and the ability of the government to carry out meaningful investments. In theory, that logic still operates. The proliferation of schemes and direct cash transfer programmes eats into the output that can be invested. One way out could be a Universal Basic Income (UBI) type reconfiguration of the welfare system. But that requires a fundamental rewiring of the Indian political economy. To cite one example, the strong linkage between the system of food and fertiliser subsidies that largely ac­crue to the farmer and the cheap foodgrain available to the bulk of India’s population consumes a significant fraction of the investible surplus. Changing this system will be a political headache apart from the fact that a new system of food supplies and consumption will have to be worked out. That will be politically challenging even as it poses risks at the economic level for a huge number of consum­ers. These, and other such features of the political and economic landscape, fix an upper ceiling on the level of investment possible in India. Even with these, India’s growth continues unimpeded. n