Thursday 08 / January / 2026
New Delhi: India Ratings and Research (Ind-Ra) forecasts a robust GDP growth of 6.9 per cent year-on-year in the Financial Year (FY) 2027, building on the 7.4% forecast for FY26. Key domestic reforms are poised to act as economic catalysts, including a strategic income tax cut in the FY26 budget, GST rationalisation, and three pivotal foreign trade agreements with Oman, the UK, and New Zealand.
These measures are expected to shield the economy from global challenges, notably the US tariffs. "The main challenges include the mid-2026 El Nino, a weak currency from tepid turbulence, capital flows, sluggish global trade, a strong FY26 growth base effect, and slower net production tax growth due to GST changes. Emerging tech like Al also presents new hurdles," says Dr Devendra Kumar Pant, Ind-Ra's Chief Economist and Head of Public Finance.
Ind-Ra sees potential for FY27 growth to outstrip predictions, particularly with a swift Indo-US trade deal and a favorable Indian Ocean Dipole mitigating El Nino impacts. Conversely, a weaker-than-expected revival in demand could temper growth. Upcoming changes to the base year for GDP and CPI to 2022-23 and 2024, respectively, will prompt a revision of the current economic outlook once new data is available.
Consumption: The Demand Dynamo : Private Final Consumption Expenditure (PFCE), after a mild 5.6% uptick in FY=24, showed resilience with 7.2% growth in FY25 and 7.5% in the first half of FY26. While rural demand remains robust, urban consumption lags. With five consecutive quarters of agricultural GVA growth surpassing 3.5% and declining inflation in FY26, consumption demand is set for a sustained boost.
Government consumption expenditure remains subdued due to fiscal consolidation efforts, yet Gross Fixed Capital Formation (GFCF) stays buoyant, driven by government capital expenditure and residential housing support. While India's export growth faced US tariff challenges, services exports maintained steady momentum.
PFCE, accounting for 55.9% of GDP (2QFY26), is projected to grow by 7.6% in FY27. Key drivers include strong service sector growth, low inflation turning real wages positive, FY26's income tax cut, and GST rationalisation. Agricultural GVA growth remains optimistic, with promising weather conditions enhancing prospects.
Inflation is projected to remain within RBI's target, with stable agricultural growth and low inflation supporting rural and urban wage growth, thus bolstering consumption.
Ind-Ra anticipates GFCF to grow 7.8% yoy in FY27, with robust government-led capex. After PFCE, GFCF is the second-largest GDP component (2QFY26: 34.4%). Though some sectors like telecom and chemicals may see slower capex, others like power, logistics, and real estate continue robust growth.
Global tech giants are turning India into an investment hotspot, especially in electronics and mobile manufacturing, though further policy enhancements are needed to solidify India's role in the global supply chain.
US Tariffs: Less Impactful Than Feared Despite US tarif hikes increasing global economic uncertainty, the impact is less severe than anticipated. The IMF now projects a 3.2% global GDP expansion in 2025, a revision from earlier lower forecasts. However, tariffs on Indian goods have surged, affecting USD74.33 billion worth of exports. The US tarifs are straining global economic activities, with a decline in manufacturing PMIs, although food item tariff reductions offer limited respite for India.
For FY27, Ind-Ra expects CPI and WPI to average 3.8% and 2.3%, respectively. Retail and wholesale inflation have remained low, thanks to food product deflation and GST rationalisation. The RBI's policy rate cuts have limited room for further reductions, hinging on GDP and CPI data updates.
Fiscal and Current Account Projections: The union government's net market borrowing is expected to decline as debt-to-GDP ratios improve. The fiscal deficit for FY27 is estimated at 4.1%. The current account deficit may widen slightly due to trade volatility, with the rupee averaging 92.26/USD in FY27. The RBI is likely to manage currency volatility through strategic forex interventions.
