India’s economic story is expected to remain on a path of “prudent resilience” in the near term, even as global uncertainty continues to rise, the Department of Economic Affairs (DEA) said in its monthly economic review for May.However, the report warned that the ongoing conflict in the Middle East, rising crude oil prices and the possibility of weaker than usual monsoon rains could pose challenges to growth and lead to inflationary pressures in the coming months.Despite these risks, the DEA said the local economy remains on solid footing. Manufacturing and service activity continue to expand, labor market conditions remain stable, and India’s strong foreign exchange reserves provide a crucial buffer against external shocks.“The near-term outlook for the Indian economy is cautiously resilient,” the Ministry of Economic Affairs noted.“Domestic fundamentals remain broadly sound, manufacturing and services PMIs are in expansionary territory, the labor market is stable, and foreign exchange reserves provide a useful buffer against external shocks.”
Conflict in the Middle East and oil prices increase concerns
However, she said that the global situation has become more difficult since the beginning of the conflict in the Middle East.
The report noted that rising crude oil prices and slowing growth in major economies create challenges from which “India cannot completely isolate itself.”The review also cited concerns about inflation. While retail inflation remained low at 3.48% in April 2026 and remained below the RBI target, wholesale inflation jumped to 8.3%.“The current divergence between retail and wholesale inflation suggests that upstream cost pressures are increasing, and that pass-through to consumers, although limited so far, may not be far behind,” he said.According to management, wholesale prices rose due to rising global energy prices, currency depreciation and a lower basis effect. It also warned that the recent increase in petrol and diesel prices “may activate direct and indirect transport channels”, which could lead to higher costs across the economy.The review said a weak monsoon could add to these pressures by raising food prices.
Industry and investment indicators remain strong
Despite these concerns, many parts of the economy continued to perform well.
Cement, steel and electricity generation remained strong in April, supported by demand from infrastructure and construction projects, the ministry said.“The resilience of the cement, steel and power generation sectors continued to support overall momentum, reflecting continued domestic demand from infrastructure and construction activity.”The HSBC India Manufacturing PMI remained in expansionary territory, even though companies faced higher input costs.
The report also noted growth in export orders, employment and investment commitments in sectors such as automotive, semiconductors, electronics and defense manufacturing.The review highlighted that total FDI inflows reached a record high of $94.5 billion in fiscal year 2026, “indicating continued long-term investor interest.” Growth in services exports also helped reduce the trade deficit.
Hormuz disturbance and monsoon in focus
Looking to the future, the ministry said that disruptions in the Strait of Hormuz remain a major concern.
“The duration of the Strait of Hormuz disruption remains the single most important variable for India’s external outlook and prices.”It also warned that the performance of the monsoon will be decisive. With the IMD forecasting rainfall at around 92% of the long-period average, the ministry said “any significant rainfall deficit combined with current geopolitical conditions could translate into food inflation, weakening rural demand and overall growth.”The review concluded that managing growth and inflation in FY2027 will require prudent policy actions as global uncertainty persists.Getting through next year “will require flexibility across the monetary, fiscal and structural dimensions to protect growth momentum and keep inflation permanently stable, even as uncertainty in the global environment persists,” he said.