Domestic Reforms to Drive 6.9% GDP Growth in 2026-27 Despite US Tariffs: India Ratings

India Ratings and Research (Ind-Ra) projects India’s Gross Domestic Product growth at 6.9% for the financial year 2026-27, moderating from a forecast of 7.4% for the current fiscal year. The agency stated that domestic structural reforms--specifically the income tax cut in the 2025-26 budget, Goods and Services Tax (GST) rationalisation, and foreign trade agreements with Oman, the United Kingdom, and New Zealand--will buffer the economy against global volatility primarily stemming from United States tariffs.

Devendra Kumar Pant, Chief Economist and Head Public Finance at Ind-Ra, cited five major headwinds: the El Niño pattern expected from mid-2026, currency weakness driven by weak capital flows, sluggish global trade growth, the high base effect from strong growth in 2025-26, and slower growth of net production taxes due to GST rationalisation. 

“Another emerging headwind is artificial intelligence,” Pant said. 

However, Ind-Ra believes risks to the 2026-27 outlook are evenly balanced. A faster India-US trade deal and a favourable Indian Ocean Dipole could mitigate the El Niño impact, potentially pushing growth beyond estimates, though weaker-than-expected demand remains a downside risk. The agency also noted that the government will change the base year for GDP and the Consumer Price Index (CPI) to 2022-23 and 2024, respectively, in the coming months, necessitating a revision of this outlook once new data is released.

Ind-Ra forecasts Private Final Consumption Expenditure (PFCE), which accounts for 55.9% of GDP, to grow 7.6% in 2026-27, compared to 7.4% in 2025-26. The agency attributes this to strong services growth and rising real wages in rural areas, supported by benign inflation. Ind-Ra highlighted that agricultural Gross Value Added (GVA) growth exceeded 3.5% for five consecutive quarters ending in the second quarter of 2025-26.

Current weather conditions and rabi sowing data suggest this momentum will continue through early 2026-27. The agency compared this to the period between the first quarter of 2026-17 and the second quarter of 2018-19, where average PFCE growth was 7.3% with a GDP deflator averaging 4.0%. In the recent five-quarter streak, the GDP deflator growth was 2.2%, supporting a 7.1% rise in PFCE.

Defined by sustained government capital expenditure, Gross Fixed Capital Formation (GFCF) is projected to expand by 7.8% in 2026-27, up from 7.4% in 2025-26. While state government capex may continue at a marginally slower pace, it remains a key driver. Ind-Ra noted divergent sectoral trends: sectors such as power, logistics, warehousing, and retail real estate are maintaining capex momentum, while telecom, chemicals, and garment exporters face a slowdown. Oil and gas and metro real estate are expected to see flattish growth.

The agency observed that Global Capability Centers (GCCs) are attracting significant investment, with major technology players like Microsoft, Amazon, and Google establishing or expanding operations. India exported Apple iPhones worth over $10 billion in the first half of 2025-26, facilitated by the Production-Linked Incentive (PLI) scheme. However, Ind-Ra cautioned that it is too early to consider this a replacement for China in the global supply chain, emphasising the need for conducive policies to attract further investment.

On the external front, US trade policy remains a critical factor. According to Ind-Ra, the weighted average tariff on Indian imports to the US rose to 38.67% by end-December 2025 from 2.43% in January 2025. This contrasts with the US's global weighted average tariff increase to 18.55%. These tariffs affect Indian exports worth $74.33 billion. Despite this, the International Monetary Fund (IMF) revised its global GDP growth forecast for 2025 to 3.2%, suggesting the impact is lower than initially estimated. The agency noted that while US tariffs triggered a decline in global manufacturing Purchasing Managers’ Index (PMI) in late 2025, a subsequent reduction of tariffs on 200 food items by the US is unlikely to significantly benefit India due to low export volumes in those commodities.

Regarding price stability, Ind-Ra expects retail inflation (CPI) and wholesale inflation (WPI) to average 3.8% and 2.3% respectively in 2026-27, remaining within the Reserve Bank of India’s (RBI) target. The agency pointed to deflation in food products and structural price changes from the September 2025 GST rationalisation as key factors. Following a 125 basis points cut to 5.25% in December 2025, Ind-Ra expects limited scope for further easing, predicting rates will not decline by more than 25 BPS from current levels.

Ind-Ra projects the central government’s fiscal deficit to narrow to 4.1% of GDP in 2026-27. Gross and net market borrowings are estimated at ₹16.14 trillion and ₹10.6 trillion, respectively. The decline in net borrowing is attributed to higher repayments of ₹5.5 trillion. The debt-to-GDP ratio is expected to decline to 55.5%.

However, the current account deficit is expected to widen marginally to 1.5% of GDP in 2026-27 from 1.3% in 2025-26. The goods trade deficit stood at $223.11 billion for the first eight months of 2025-26, partially offset by a services surplus of $134.14 billion. Ind-Ra forecasts the Indian rupee to average ₹92.3 against the US dollar in 2026-27, with the RBI likely intervening to manage volatility.