India’s GDP to Grow 6.5% in FY26 — What S&P’s Forecast Means for Consumers and Policy

S&P Global Ratings expects India’s GDP to expand 6.5% in FY26 and 6.7% in FY27, driven mainly by resilient domestic consumption amplified by recent tax and GST reductions and lower interest rates. That shift toward a consumption-led expansion — rather than an investment-heavy rebound — has implications for households, policymakers and export sectors navigating global uncertainty.

Why consumption is the engine this time

According to S&P’s analysis, reductions in goods and services tax (GST) rates together with income-tax cuts and looser monetary conditions are lifting disposable incomes for a large segment of Indian households. Lower interest rates reduce borrowing costs and ease EMIs, while tax relief directly raises take-home pay — both factors tend to raise consumer confidence and spending on services and discretionary goods. In S&P’s view, these policy moves will support stronger household consumption growth over the next two fiscal years.

Policy tailwinds: GST cuts, tax relief and rate easing

The combination of fiscal measures (targeted GST cuts and income-tax relief) and monetary easing provides a visible policy package that favors consumption. With borrowing costs down, both mortgage and consumer-loan burdens fall, which increases spendable income. Together, these measures create a virtuous loop: higher spending raises demand for goods and services, which supports employment and incomes — feeding back into consumption.

Investment vs consumption: a rebalanced growth mix

S&P notes that consumption is likely to play a larger role than investment over FY26–27. That doesn’t mean investment will collapse; instead, the immediate uptick in demand is expected to be driven by households rather than capital formation. For sustained long-term growth, however, a later recovery in private and public investment — especially in infrastructure and manufacturing — will be necessary.

External environment and trade uncertainties

The report also flags geopolitical and trade-related uncertainties. India is navigating capital outflows and currency pressure linked to high US tariffs and delays in formal trade deals. S&P suggests that once favorable trade pacts — particularly one with the US — enter into force, confidence should improve and labour-intensive export sectors would see a boost.

Asia-Pacific context: China and regional trade dynamics

S&P’s regional analysis highlights steady Asia-Pacific growth. China’s export resilience has been a notable upside surprise, while domestic demand there remains weaker. Outside China, steady global demand for tech goods — semiconductors in particular — and lower oil prices are supporting export and domestic activity across the region. S&P expects a mild strengthening of Asia-Pacific currencies against the US dollar by the end of 2026 as trade flows realign.

Monetary policy outlook across major economies

Monetary conditions vary across the region: recent rate reductions in some markets and a potential additional tightening step in others (such as a moderate hike in Japan’s policy rate) create mixed trajectories. For India, lower domestic rates should amplify the consumption effect, but the RBI will still be mindful of inflation and currency volatility.

Risks to the outlook

S&P stresses that risks are evenly balanced: upside gains from quicker-than-expected recovery in confidence and trade deals, versus downside risks from external shocks (sharp oil-price increases, renewed global inflation, or trade disruptions). Currency weakness and capital outflows could also constrain policy maneuverability.

What this means for businesses and households

• Households: Lower taxes and interest costs mean higher disposable incomes; discretionary spending (retail, travel, personal services) is likely to pick up.

• Businesses: Consumer-facing sectors — FMCG, retail, entertainment, and services — stand to benefit immediately. Exporters will watch trade-pact developments; labour-intensive exporters could gain if trade barriers fall.

• Policymakers: The challenge will be to sustain consumption without sacrificing long-term investment in infrastructure and human capital.

Conclusion

S&P’s forecast of 6.5% GDP growth for India in FY26 points to a near-term growth story built on stronger household consumption, reinforced by GST and income-tax cuts and lower interest rates. While this consumption-led expansion should boost demand and employment in the short run, policymakers need to balance these gains with measures that revive investment and shield the economy from external shocks. If favorable trade deals materialize and confidence holds, India’s demand-driven recovery could translate into broader and more durable growth in FY27 and beyond.

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