Investments, consumption to drive growth in FY26 to 6.6%: India Ratings

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 central bank for the current fiscal

Gradual improvement in consumption demand and investments from both the public and private sector due to monetary easing are expected to push India’s economy to grow a tad faster at 6.6 per cent in the financial year 2025-2026 (FY26) compared with the downward revised projection of 6.4 per cent for the current financial year, India Ratings and Research said on Wednesday.

 

“India-Ratings expects investments to be a key growth driver in FY26. Capital formation is forecasted to increase by 7.2 per cent in FY26 as both the government and private sectors are expected to contribute towards the Gross Fixed Capital Formation (GFCF) growth in FY26. Low interest rates are necessary but not sufficient conditions for investment demand. Consumption is expected to see a marginal uptick to 6.9 per cent as better-than-normal rainfall in 2024 and real rural wages turning positive in Q2FY25 have given a boost to rural demand, while concerns linger on urban demand,” said the credit rating agency in its ‘FY2026 Macro Economic Outlook’.

 

Devendra Kumar Pant, chief economist at India-Ratings, said that the Indian economy is experiencing a cyclical growth slowdown in the past three quarters, which it expects to reverse from Q3FY25.

 

“[We] believe that India 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. Nevertheless, the FY26 growth is expected to be the same as India’s best decadal growth (FY11-20),” he added.

 

Besides, the rating agency also noted that inflation will likely decline to 4.3 per cent in FY26 from 4.8 per cent projected by the central bank for the current financial year. However, despite the projected decline, the February cut is likely to be more data-dependent and the rate cut will be shallow and within 100-125 bps in the current easing cycle.

 

Also, the rating agency expects the fiscal deficit to decline to 4.5 per cent in FY26 from 4.8 per cent in the current financial year as government consumption expenditure growth is expected to remain muted at 4.3 per cent in FY26.

 

“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 noted.

 

The rating agency also noted that agriculture growth will likely taper off to 3.4 per cent in FY26 from 3.8 per cent growth expected this year and the industry is expected to perform better on the back of muted performance this year, and services are likely to hold steady.