Even as the Indian economy is facing monetary, fiscal and external tightening at present, going ahead, monetary easing, improvement in investments and capex — public and private — are expected to support growth in the upcoming financial year, India Ratings and Research said in its FY26 released on Wednesday. India’s Gross Domestic Product (GDP) growth is expected to grow 6.6 per cent in FY26, 20 basis points higher than the agency’s revised forecast of 6.4 per cent for FY25, the Fitch Group company said.
“The Indian economy has experienced a cyclical growth slowdown in the past three quarters, which it expects to reverse from Q3 FY25. The GDP growth till FY24 was impacted by the after effects of COVID-19, even the base effect impacted the quarterly GDP growth. While the Q1 FY25 GDP growth was impacted by the combination of a strong base effect and the general elections in May 2024, the growth in Q2 FY25 witnessed the extended impact of weak private sector capex. Ind-Ra believes the Indian economy is facing monetary, fiscal and external tightening. While it expects monetary conditions to ease now, the fiscal and external tightening is expected to continue in FY26 as well. Nonetheless, the FY26 GDP growth is expected to be the same as India’s best decadal growth (FY11 to FY20),” Devendra Kumar Pant, Chief Economist and Head Public Finance, India Ratings said.
However, India Ratings said growth and inflation forecasts could be affected by any tariff war, and any capital outflow, if the dollar continues to strengthen.
On the demand front, while the better-than-normal rainfall in 2024 and real rural wages turning positive in Q2 FY25 have given a boost to rural demand, there are concerns on urban demand, the agency said. The growth in private final consumption expenditure (PFCE) is expected to be 6.7 per cent in FY25 from 4 per cent in the previous year (barring Covid year of FY21). “While the festive demand and low base of FY24 augur well for the H2 FY25 PFCE growth, higher inflation and low wage growth are likely to have some adverse impact on the PFCE growth in H2 FY25,” it said.
India’s GDP growth had slowed to a near two-year low of 5.4 per cent in July-September. The Indian economy is expected to grow 6.5-7 per cent in FY25, as per the Economic Survey, while the Reserve Bank of India expects a GDP growth of 6.6 per cent for the current financial year.
Investments are expected to be a key growth driver in FY26, like in FY22 and FY24, with Gross Fixed Capital Formation (GFCF) — an indicator of capital investment in the economy — is projected to increase 7.2 per cent in FY26 from an estimated 6.7 per cent in FY25. “The general elections in Q1 FY25 and its lingering impact on investment activities in Q2 FY25 are mainly responsible for the weak GFCF growth in FY25. The private sector capex is still not broad based and concentrated in a few sectors such as roads, airports, renewable energy etc. Private sector participation in capex is important for sustainable economic growth and may alleviate some pressure on the government deficit,” the agency said.
On the fiscal front, India Ratings expects the Union Government to achieve its fiscal consolidation roadmap. “The union and state governments are committed towards fiscal consolidation…the quality of government expenditure has changed since FY21 with a larger focus on capex. The policy of providing support in the form of current expenditure to capital expenditure has been changed both by union and state governments,” it said.
The rating agency also noted that inflation is likely to decline to 4.3 per cent in FY26 from 4.8 per cent projected by the RBI for the current fiscal. But despite the lower inflation projection, the February rate cut by the RBI will be more data dependent, Pant said, adding that the rate cut will be shallow, within 100-125 basis points, in the current easing cycle.
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