India enters FY27 with strong momentum, but external risks emerge: ICRIER

India entered FY27 on a strong footing, with domestic economic activity remaining resilient on the back of robust consumption and a strengthening investment cycle, even as inflation, employment and external sector indicators showed emerging concerns,  according to the first edition of the India Macro Monitor by the Indian Council for Research on International Economic Relations (ICRIER) released on Tuesday. 

The quarterly assessment done by economists Shekhar Aiyar, Aashi Gupta and Dr. Yougesh Khatri  said that high-frequency indicators pointed to sustained economic momentum in the first quarter. GST e-way bill generation rose 14.5% year-on-year in June, while GST revenue increased 13.9%. Electricity demand grew 11.5%, while retail passenger vehicle sales jumped 28.6%. Tractor and two-wheeler sales also increased 25.3% and 21.2%, respectively.

Industrial activity remained strong, with the Index of Industrial Production (IIP) growing 7.3% year-on-year in June. Capital goods production rose 14.2%, while imports of capital goods surged 38.7%, indicating continued investment momentum despite a weakening external environment. The manufacturing PMI stood at 54.2 in June, while the services PMI was at 57.4.

However, inflationary pressures have re-emerged. Headline consumer price inflation rose to 4.4% in June, crossing the Reserve Bank of India’s 4% target for the first time in 18 months. ICRIER said the widening gap between WPI and CPI points to emerging pipeline pressures.

Labour market conditions remained stable but showed signs of losing momentum, particularly among young workers. The all-India unemployment rate increased to 5.5% in June, from 5.2% in April, while urban unemployment stood at 6.6%.

The external sector emerged as another area of concern. India’s merchandise trade deficit stood at $86.9 billion in Q1 FY27, while global export-order indicators weakened. The global PMI export orders index fell to 49.2 in June, below the 50 mark indicating contraction.

Despite these pressures, India’s external buffers remained comfortable, with foreign exchange reserves at $675.2 billion as of July 10, equivalent to around 10.3 months of import cover.

ICRIER said financial conditions remained supportive, with ample liquidity, easing bond yields and robust credit growth. However, weaker export demand and persistent rupee underperformance point to emerging external vulnerabilities.