In what is shaping up to be a challenging FY26, India is still expected to post a healthy growth rate of about 7.4%, with services leading the charge and capital formation remaining robust. Gross value added (GVA) is estimated to grow by 7.3%, with manufacturing, trade, and financial services performing reasonably well-though partly aided by a favourable base. Even with trade relations with the US disrupted, exports are projected to grow by over 6%.
The weak spot remains agriculture. Growth in the sector is estimated at just 3.1%, well below last year’s 4.6%, and comes at a time when market prices for several crops are already under pressure. This is a concern both for rural incomes and for broader consumption demand.
Private consumption, too, is expected to grow by only about 7% in FY26, slower than in FY25-a disappointing outcome given the government’s efforts to revive demand. Measures such as income tax cuts, goods and services tax rate rationalisation, and falling interest rates were expected to lift household spending more decisively. That recovery, however, has not been as broad-based as hoped. As many had anticipated, the festive-season boost appears to be tapering off. This helps explain why GDP growth is estimated to grow at just 6.9% in the second half of FY26. Additional headwinds include the lingering impact of US tariffs on merchandise exports, a contraction in government capital expenditure, and an unfavourable base effect.
Why tax cuts haven’t sparked a spending spree
A bigger concern lies in nominal GDP growth. At an estimated 8% for FY26, it would fall well short of the assumed 10.1% and below the 9.8% recorded in FY25. That said, with nominal GDP projected at Rs 357.1 lakh crore, meeting the targeted fiscal deficit of 4.4% of GDP should still be manageable. Any shortfall in tax revenues can be offset through higher non-tax receipts and calibrated expenditure restraint.
While these estimates will inevitably be revisited once the national accounts base year is updated to 2022-23 from 2011-12-and revisions are made to consumer price index and index of industrial production series-it is worth looking ahead to FY27. The biggest uncertainty is the long-pending India-US trade deal. Unless tariffs are rolled back soon, merchandise exports will continue to face pressure, with knock-on effects on jobs and incomes. That is where the real test lies.
Policy must focus more on engines that can raise potential growth. That means improving the quality of public spending, easing regulatory frictions that deter private investment, fixing distortions in household savings, and accelerating reforms in labour, land, and logistics.
Navigating the India-US Export Landscape
On the fiscal front, the government’s room for manoeuvre will be limited. After a year of stimulus, it is unlikely to sacrifice much more revenue or allow the fiscal deficit to exceed 4.3%. A meaningful increase in capital expenditure also appears unlikely. Private investment remains tentative, with demand recovery uneven outside a few pockets such as passenger vehicles. Based on the current base, GDP growth in the next fiscal could slip below 7%.
Some support, however, should come from lower interest rates as monetary easing feeds through to stronger credit flows. Investment in areas such as data centres could generate employment and boost demand for construction materials, especially as real estate activity begins to peak. Private-sector capex is therefore expected to improve gradually. With benign crude oil prices and a measure of good fortune, growth could edge back above 7% in FY27-but the margin for error is narrowing.