L&T India | Annual Report Highlights | Management Discussion & Analysis

Economy

Indian Economy

The Indian economy demonstrated resilience in FY 2025-26 amidst a challenging global environment characterised by geopolitical turbulence and fragmented trade conditions. India's real GDP growth for FY 2025-26 is estimated at approximately 7.4% - 7.6%, backed by domestic demand and sustained public capital expenditure. The private sector investment, while improving, remained measured, reflecting differentiated risks amidst a volatile trade and tariff environment.

India's headline inflation moderated significantly during FY 2025-26 and averaged around 2.0-3.0%, reflecting easing food and fuel prices and contained core inflation. Inflationary pressures remained well within the Reserve Bank of India's (RBI's) tolerance band, notwithstanding episodic volatility in select components.

Monetary conditions during FY 2025-26 remained supportive of economic activity. The RBI reduced the policy repo rate from 6.25% at the start of FY 2025-26 to 5.25%, balancing growth considerations with price stability amid evolving external risk conditions. System liquidity remained adequate, facilitating steady credit expansion to productive sectors, while the banking system and corporate balance sheets remained largely healthy.

India's external sector faced a challenging environment marked by weak merchandise demand, trade disruptions and tariff-related uncertainties. Goods exports remained under pressure, while imports, particularly of crude oil and electronics, were elevated. In contrast, services exports, led by IT and business services, cushioned the trade account deficit. Remittances remained robust, providing support to external finances. Consequently, the current account deficit remained contained at around 1.0-1.5% of GDP.

During FY 2025-26, the Indian rupee followed a depreciating trend, moving from the mid - ₹ 85 range towards the ₹ 93-94 per USD level. Depreciation accelerated mid-year amidst tariff-related uncertainties and portfolio outflows, while a more marked weakness was observed in March 2026 driven by developments in West Asia. The exchange rate movement was supported by adequate foreign exchange reserves and prudent macroeconomic management.

India's service sector and digital economy, which are relatively less exposed to disruptions in West Asia, are expected to remain key growth engines. Momentum is likely to be sustained by continued expansion in fintech, cloud technologies, AI-enabled services and the rise of Global Capability Centres (GCCs).

The US-Israel-Iran conflict poses significant energy-related risks, with rising crude prices, LNG disruptions and elevated shipping and insurance costs directly impacting India's import bill and overall trade. This has already led to supply chain uncertainties with early spillover effects beginning to weigh on select energy-intensive and import-dependent sectors.

India's ability to navigate these challenges will depend on maintaining macroeconomic stability, strengthening domestic demand drivers, and sustaining reform momentum to support economic growth.

Global Economy

Global economic growth in calendar year 2025 is estimated at around 3.0%, reflecting heightened geopolitical tensions, evolving trade policies and divergent domestic policy responses across major economies. Growth was increasingly divergent across regions. While financial conditions improved modestly, supported by declining inflation and expectations of a gradual recalibration of monetary policy, the overall uncertainty quotient remained high.

The global economy entered CY 2026 in a fragile state, with key downside risks arising from higher policy uncertainty and escalating tensions arising from the conflict in West Asia. In CY 2025, US GDP growth was around 2.0%, supported by household consumption, sustained investment in technology and a broadly stable labour market. However, high energy prices, trade barriers, regulatory uncertainty and tighter financial conditions pose risks to economic momentum.

Growth in the Euro Area was subdued at around 1.5% in CY 2025, constrained by weak economic conditions, structural inefficiencies and continuing energy-related challenges. In China, growth was estimated at about 4.5%, as the economy faces a complex adjustment amidst slowing external demand, continued stress in the property sector, subdued consumer confidence and weaker trade. Potential tariff actions by the United States could further impact China's export oriented sectors, adding to near term growth challenges.

The Gulf Cooperation Council (GCC) region - led by Saudi Arabia - strengthened its growth foundation through sustained investments in physical and digital infrastructure alongside accelerated economic diversification. Real GDP growth across the GCC averaged about 3.0-3.3% in CY 2025, led by stronger performance in the UAE and Saudi Arabia, while other member countries recorded more moderate growth. Structural reforms across the GCC continue to support a gradual transition away from oil dependence, with clean energy, diversified industrialisation and tourism emerging as key growth drivers.

Against this backdrop, economic resilience will increasingly depend on domestic demand, fiscal capacity and progress in reducing energy dependence, even as international economic fragmentation continues to weigh on trade flows, investment activity and overall economic sentiment.