FDI surges to five-year high as India's domestic economy stays resilient despite inflation, trade headwinds: BCG

India's economy continues to demonstrate resilience in the face of mounting global headwinds, with foreign direct investment (FDI) surging to a more than five-year high, investment activity remaining robust and domestic demand holding firm even as inflationary pressures intensify and external trade challenges persist, according to the latest India Economic Monitor released by Boston Consulting Group (BCG).

The report paints the picture of an economy where the underlying growth engine remains intact despite emerging signs of moderation. While investment, manufacturing activity and digital payments continue to expand, policymakers and businesses are increasingly having to contend with elevated wholesale inflation, softer consumer confidence and a narrowing services trade surplus.

Capital inflows signal investor confidence

Among the standout indicators was a sharp rise in foreign investment.

FDI inflows climbed to $11.4 billion in April, the highest monthly level in more than five years, driven by stronger equity inflows and lower repatriations by foreign investors. The report notes that calendar-year FDI inflows have already reached $23 billion in 2026, indicating sustained overseas confidence in India's long-term growth story despite an uncertain global investment environment.

The report also highlighted that India's merchandise trade deficit narrowed to $28.2 billion in May, supported by healthy engineering exports, even as imports remained elevated due to higher crude oil and petroleum purchases. However, the services trade surplus narrowed to $17.7 billion, reflecting faster growth in services imports than exports. Foreign exchange reserves also edged lower during the month as foreign currency assets and gold holdings declined.

Investment continues to power growth

BCG argues that India's growth story is increasingly being driven by investment rather than consumption.

According to the report, real GDP expanded 7.8% year-on-year in the March quarter, supported by 11.4% growth in gross capital formation, the strongest increase in recent years. Private consumption also remained healthy, rising 7.1%, while government consumption moderated as fiscal expenditure was rationalised toward the end of FY26 to meet deficit targets.

The report said the services sector remained the economy's biggest growth engine, expanding 10%, driven by trade, financial services, real estate and professional services. Industry grew 7.3%, supported by manufacturing and construction, while agriculture remained comparatively subdued at 3.6%.

"Strong investment momentum and services-sector resilience continue to offset global uncertainty," the report noted, adding that gross capital formation recorded its strongest growth in recent years.

Domestic demand stays firm, but warning signs emerge

High-frequency indicators continued to point towards resilient domestic activity.

Manufacturing PMI edged up to 55 in May as stronger domestic demand, infrastructure spending and new business supported factory output, while the services PMI rose to 59.8, reflecting healthy demand across freight, digital services, e-commerce, entertainment and IT. UPI transactions touched a record ₹29.9 trillion during the month, highlighting continued strength in digital consumption. EV registrations surged 80% year-on-year, significantly outpacing overall automobile sales growth.

At the same time, industrial activity presented a mixed picture. Steel consumption rebounded and power demand increased amid intense summer heat, but the Index of Industrial Production softened in April as mining and manufacturing growth slowed, while cement production witnessed a cyclical decline. Air passenger bookings also weakened due to higher fares and softer travel demand.

Inflation remains the biggest macro challenge

While growth indicators remained encouraging, inflation emerged as the report's principal area of concern.

Wholesale price inflation accelerated sharply to 9.7% in May—the highest level under the revised series—driven by rising crude oil, natural gas, mineral oil and manufactured product prices. Retail inflation also climbed to a 16-month high of 3.9%, led by transport, food and personal care costs.

Consumer confidence weakened across both rural and urban India during May, with households reporting lower optimism on income, employment, spending and overall economic conditions. Meanwhile, the fiscal deficit widened to ₹3.6 trillion in April due to lower revenue receipts following year-end normalisation, while GST collections moderated to ₹1.94 lakh crore after April's record-high collections.

Despite these headwinds, BCG said the broader growth narrative remains intact. It noted that most forecasters continue to expect India's economy to grow between 6% and 7.1% in FY27, with the Reserve Bank of India maintaining its projection of 6.6%, suggesting that robust domestic fundamentals continue to outweigh external uncertainties.