Although the Indian economy is currently facing monetary, fiscal and external tightening, going forward, monetary easing, improvement in investment and capital – public and private – are expected to support growth in the coming financial year, India Ratings & Research said in its report. FY26 was released on Wednesday. India’s gross domestic product (GDP) growth is expected to be 6.6 percent in FY26, 20 basis points higher than the agency’s revised forecast of 6.4 percent 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 FY25 Q3. The post-Covid-19 impact had an impact on the GDP growth up to the financial year 2074, while the fundamental impact also impacted the quarterly GDP growth. While Q1 FY25 GDP growth was influenced by a combination of strong base effects and the May 2024 general election, growth in Q2 FY25 saw the amplified impact of weak private sector capital expansion. Ind-Ra believes that the Indian economy is facing monetary, fiscal and external rigidity. While it expects monetary conditions to ease now, fiscal and external tightening is expected to continue in FY26 as well. However, FY26 GDP growth is expected to be similar to India’s best decadal growth (FY11 to FY20),” said Devendra Kumar Pant, Chief Economist and Head of Public Finance, India Ratings.
However, India Ratings said growth and inflation forecasts could be affected by any tariff war, and any capital outflows if the dollar continues to strengthen.
On the demand front, better-than-normal rainfall in 2024 and positive rural wages in Q2 FY25 have boosted rural demand, with concerns over urban demand, the agency said. 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 (excluding the covid year of FY21). “While festive demand and a low base in FY24 bodes well for H2 FY25 PFCE growth, higher inflation and lower wage growth are likely to have some adverse impact on PFCE growth in H2 FY25,” it said.
India’s GDP growth was the lowest in nearly two years at 5.4 percent in July-September. According to the Economic Survey, the Indian economy is expected to grow by 6.5-7 per cent in FY25, while the Reserve Bank of India has projected a GDP growth of 6.6 per cent for the current financial year.
As in FY22 and FY24, investments are expected to be the key growth driver in FY26, with Gross Fixed Capital Formation (GFCF) – an indicator of capital investment in the economy – expected to grow by 7.2 per cent from an estimated 6.7 per cent in FY26. percent in FY25. The general election in the first quarter of FY25 and its lingering impact on investment activities in the second quarter of FY25 are primarily responsible for the weak GFCF growth in FY25. Private sector capital is not yet broad and concentrated in some areas like roads, airports, renewable energy etc. Private sector participation in capital is important for sustainable economic growth and can reduce some of the pressure on government deficits,” the agency said. .
On the fiscal front, India Ratings expects the central government to achieve its fiscal consolidation roadmap. “The Union and State Governments are committed to fiscal consolidation…the quality of government expenditure has changed since FY21 with greater focus on capital expenditure. Both the Union and State Governments have changed their policy of supporting capital expenditure as current expenditure,” it said.
The rating agency also noted that inflation is likely to decline to 4.3 percent in FY26 from the RBI’s forecast of 4.8 percent for the current fiscal. But despite the low inflation projection, the February rate cut by the RBI will be more data dependent, Pant said, adding that the rate cut would be within 100-125 basis points, lower than in the current benign cycle.
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