As Finance Minister Nirmala Sitharaman prepares to present the Union Budget for 2026–27 on February 1, there are expectations around a sharper policy push to stimulate growth via private consumption, rather than through fresh capex-heavy spending. According to Goldman Sachs’ India 2026 outlook, a broad-based recovery in household demand is expected to act as a key cushion for growth amid tighter fiscal conditions.
The Goldman report detailed that, “The nascent recovery in urban consumption growth in CY25 is likely to have more legs in CY26, supported by the lagged impact of monetary easing and the recent GST rate rationalisation.”
Why Goldman Sachs predicts 7.7% consumption growth
The global brokerage house stated that bank credit growth has shown signs of improvement after bottoming out earlier last year. As per data available, bank credit has increased to 11.2% YoY in the October-December quarter, and Goldman Sachs expects “it to recover to around 13% YoY in CY26.”
“This, along with strong rural demand, would likely result in a further improvement in consumption growth in CY26 to 7.7% YoY,” Goldman Sachs highlighted. Consumption growth thus far has been hovering around the 7% mark for the last two years- 2025, 2024.
A year of policy reset
India’s real GDP growth held up at 7.6% year-on-year in 2025, despite what it describes as “the highest US tariffs in the region” and prior fiscal consolidation. The resilience, the report argues, came largely from consumption rather than investment, helped by a recovery in rural demand and early signs of an urban catch-up.
According to Goldman Sachs, “Consumption growth remained strong on a sustained recovery in rural consumption, while investment growth improved significantly on higher general government capital expenditure in H1 CY25 and higher capital goods production, likely reflecting the front-loading of exports to the US ahead of the impending tariffs.”
The past year marked a clear shift in the government’s approach to supporting growth. After two years of aggressive fiscal consolidation, the Centre moderated the pace of tightening in FY26 and altered the composition of spending, the report added.
Income tax slabs were readjusted to deliver personal income tax relief worth 0.3% of GDP, while GST rates on mass consumption products were cut, adding another 0.2% of GDP in consumption support. Together, these measures marked a pivot away from public capex-led stimulus towards boosting household demand, Goldman Sachs noted.
The impact was amplified by benign inflation. Headline CPI inflation averaged just 2.2% in 2025 and touched a record low of 0.3% year-on-year in October, lifting real incomes and reinforcing consumption recovery even as nominal GDP growth slowed to a six-year low outside the pandemic period.
Rural demand leads, urban consumption follows
Consumption recovery in 2025 was uneven but broadening. Rural demand strengthened on good crop output, favourable weather conditions and higher state-level cash transfers to women, which now amount to about 0.7% of GDP. Urban consumption, which had lagged due to tighter credit conditions in late 2023 and 2024, began to stabilise in the second half of 2025.
Goldman Sachs expects this divergence to narrow further in 2026. With the lagged impact of 125 basis points of policy rate cuts, easier liquidity conditions and GST rationalisation feeding through, real consumption growth is projected to rise to 7.7% year-on-year in 2026, from 7.0% in 2025.
Bank credit growth is also expected to re-accelerate to around 13% year-on-year in 2026, up from 11.2% in late 2025, providing additional support to urban consumption, which accounts for nearly 80% of household credit.
What the budget is expected to do
Against this backdrop, economists expect the budget to stay the course on consumption support rather than pivot back aggressively to public investment, the report added.
Goldman Sachs forecasts the Centre to target a fiscal deficit of 4.0–4.2% of GDP in FY27, likely opting for the higher end of the range to retain room for growth support. With welfare spending already stretched and debt reduction still a priority, the government has limited room to sharply raise capital spending.
Instead, the report expects the budget to continue favouring measures that support household demand, through tax relief, GST rationalisation on consumption items and targeted transfers, particularly if uncertainty around US trade policy persists.
Growth outlook hinges on consumption staying firm
With headline inflation expected to average 3.9% in 2026, close to the RBI’s 4% target, monetary policy space is limited. That places greater weight on fiscal policy and consumption dynamics to carry growth.
Goldman Sachs projects real GDP growth of 6.7% in calendar 2026 and 6.8% in FY27, above consensus estimates, driven largely by sustained consumption momentum and a gradual recovery in credit. A broader private investment cycle, it notes, may follow, but only with a lag.
For now, as India approaches the budget, policymakers are increasingly relying on household spending rather than government spending to support the growth amid global uncertainty.