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Ind-Ra trims India''s FY26 GDP growth forecast to 6.3 pc

Ind-Ra Lowers India's FY26 GDP Growth Projection to 6.3%, Citing Global Headwinds and Domestic Challenges

In a significant revision that underscores the mounting pressures on the Indian economy, India Ratings and Research (Ind-Ra), a subsidiary of the global rating agency Fitch Ratings, has trimmed its gross domestic product (GDP) growth forecast for the fiscal year 2025-26 (FY26) to 6.3 percent. This downward adjustment comes from an earlier estimate of 6.7 percent, reflecting a more cautious outlook amid a confluence of global economic slowdowns, persistent inflationary pressures, and subdued domestic demand. The announcement, made in the agency's latest economic outlook report, highlights the vulnerabilities that could temper India's growth trajectory even as the country strives to maintain its position as one of the world's fastest-growing major economies.

The revision is not isolated to FY26; it forms part of a broader assessment of India's economic landscape over the coming years. For the ongoing fiscal year 2024-25 (FY25), Ind-Ra has retained its growth projection at 6.8 percent, aligning with the Reserve Bank of India's (RBI) estimates and the government's optimistic targets. However, the agency warns that achieving even this figure will require navigating a complex web of challenges, including volatile commodity prices, geopolitical tensions, and a potential slowdown in key export markets. This tempered forecast arrives at a time when India's economy has shown resilience, bouncing back from the pandemic-induced contractions, but now faces headwinds that could erode some of those gains.

At the heart of Ind-Ra's revised outlook is the expectation of a softer global economic environment. The agency points to sluggish growth in advanced economies, particularly in the United States and Europe, where high interest rates and inflationary pressures are curbing consumer spending and investment. For India, which relies heavily on exports of goods and services—ranging from information technology to textiles—this translates into reduced external demand. Ind-Ra anticipates that India's export growth will moderate to around 5-6 percent in FY26, down from double-digit figures seen in previous years. This is compounded by rising import bills, especially for energy and raw materials, which could widen the current account deficit to 1.5-2 percent of GDP.

Domestically, the picture is equally nuanced. Private consumption, which accounts for nearly 60 percent of India's GDP, is expected to grow at a slower pace due to elevated inflation and uneven income distribution. Rural demand, a critical driver of consumption, has been hampered by erratic monsoon patterns and fluctuating agricultural output. Ind-Ra notes that while the southwest monsoon in 2024 was above average, leading to a projected 3.5 percent growth in agriculture for FY25, uncertainties around climate change and water scarcity could pose risks in FY26. Urban consumption, meanwhile, is being squeezed by high food and fuel prices, with retail inflation hovering around 5-6 percent, above the RBI's comfort zone of 4 percent.

Investment trends also feature prominently in the report. Gross fixed capital formation (GFCF), a key indicator of investment activity, is forecasted to rise by 8.5 percent in FY25, supported by government infrastructure spending under initiatives like the National Infrastructure Pipeline and the Pradhan Mantri Gati Shakti scheme. However, private sector capex remains subdued, with corporates adopting a wait-and-watch approach amid global uncertainties. Ind-Ra highlights that capacity utilization in manufacturing sectors is still below pre-pandemic levels, at around 75 percent, which discourages fresh investments. The agency projects GFCF growth to slow to 7.5 percent in FY26, reflecting these constraints.

On the fiscal front, Ind-Ra expresses concerns about the government's ability to balance growth imperatives with fiscal prudence. The central government's fiscal deficit is targeted at 4.9 percent of GDP for FY25, down from 5.6 percent in FY24, but achieving this will require disciplined expenditure management. The report cautions that populist measures, especially in an election year, could lead to fiscal slippages, potentially crowding out private investment through higher borrowing costs. State governments, too, are under strain, with combined fiscal deficits projected at 3 percent of GDP, adding to the overall debt burden.

Inflation dynamics are another focal point. Ind-Ra expects headline consumer price index (CPI) inflation to average 4.5 percent in FY25, easing slightly from current levels, but risks remain tilted upwards due to supply-side disruptions. Food inflation, which has been a persistent headache, is anticipated to moderate if agricultural productivity improves, but global factors like oil price volatility—exacerbated by conflicts in the Middle East and Ukraine—could push energy costs higher. The RBI, in response, is likely to maintain a cautious monetary policy stance, with repo rates expected to remain elevated at 6.5 percent through much of FY25 before gradual cuts in FY26.

Sectoral breakdowns in the report provide deeper insights into the growth composition. The services sector, India's economic backbone, is projected to grow at 7.5 percent in FY25, driven by IT, financial services, and tourism recovery. However, a slowdown in global tech spending could cap this at 7 percent in FY26. Manufacturing, under the Make in India push, is expected to expand by 6.5 percent in FY25, benefiting from production-linked incentives (PLIs) in sectors like electronics and automobiles. Yet, Ind-Ra warns of supply chain disruptions and rising input costs that might limit growth to 6 percent in the subsequent year. Agriculture, as mentioned, faces weather-related risks but could contribute steadily if supported by better irrigation and crop insurance schemes.

The report also touches on employment and income inequality, which are critical for sustainable growth. With India's labor force expanding rapidly, the economy needs to generate around 10-12 million jobs annually to absorb new entrants. Ind-Ra notes that while formal sector employment has improved post-pandemic, informal sectors—employing over 80 percent of the workforce—continue to struggle with low wages and underemployment. This could perpetuate a cycle of weak consumption, further dampening growth prospects.

In terms of external vulnerabilities, the agency assesses India's foreign exchange reserves, which stand at over $650 billion, as a buffer against shocks. However, a strengthening US dollar and capital outflows could pressure the rupee, which Ind-Ra forecasts to depreciate to 85-86 against the dollar by end-FY26. This depreciation, while aiding export competitiveness, would inflate import costs, particularly for crude oil, of which India imports 85 percent of its needs.

Ind-Ra's chief economist, Devendra Kumar Pant, emphasized in the report that while India's medium-term growth potential remains robust at 7 percent, realizing it will depend on structural reforms. These include labor market liberalization, land acquisition streamlining, and enhancing ease of doing business. The agency advocates for continued investment in human capital through education and skilling programs to leverage India's demographic dividend.

Looking ahead, the forecast underscores the need for policy agility. The government could accelerate reforms in areas like taxation and subsidies to boost efficiency. For instance, rationalizing goods and services tax (GST) slabs and expanding the tax base could provide fiscal space for growth-oriented spending. Similarly, the RBI's inflation-targeting framework will be tested, with potential rate cuts in late FY25 if global conditions improve.

Despite the downward revision, Ind-Ra maintains a positive long-term view, projecting India's economy to reach $5 trillion by FY28-29, driven by digital transformation, renewable energy transitions, and integration into global value chains. However, the path is fraught with risks, including climate change impacts, geopolitical escalations, and domestic political uncertainties.

This revised forecast from Ind-Ra serves as a reality check for policymakers, investors, and businesses alike. It highlights that while India has weathered recent storms admirably, sustaining high growth in an increasingly interconnected and volatile world will require proactive measures. As the country prepares for its next budget cycle, the emphasis will likely be on fostering inclusive growth that addresses both immediate challenges and long-term aspirations. In essence, the 6.3 percent projection for FY26 is not just a number—it's a call to action for bolstering economic resilience in uncertain times.

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