India’s Growth Set to Cool in FY27 as Policy Support Fades: QuantEco

India’s GDP growth is likely to moderate to 6.6–6.8% in 2026-27 from an estimated 7.4% in the current financial year, as the incremental support from fiscal and monetary policies wanes and an unfavourable base effect sets in, according to QuantEco Research. Even if India concludes a trade agreement with the US, the global economic environment is expected to remain strained by geopolitical and geoeconomic tensions, as reflected in recent US military operations in Venezuela.

The current year has been marked by a rare statistical phenomenon: the near convergence of real and nominal GDP growth after nearly four decades. Real GDP growth is estimated at 7.4%, with nominal GDP close behind at 8.0%. This convergence has been driven largely by a weak price deflator rather than by any overstatement of real activity. However, the momentum is already fading. Growth is estimated to have slowed from 8.0% in the first half of the year to 6.9% in the second half, owing to a slowdown in manufacturing, construction, and trade-related services on the supply side, and in private consumption on the demand side.

Consumption remains the primary driver of growth, though the recovery is uneven. Rural demand is acting as a shock-absorber. Real agricultural wages are growing at the fastest pace in nearly eight years, at over 5.0%, and tractor sales have expanded by 19.2% in April-November compared with just 4.3% a year ago. A combination of above-average monsoons, healthy crop output, and state government income-transfer schemes continues to buoy rural sentiment.

Urban demand tells a different story. While retail sales surged 11% year on year during the festive season, the gains were heavily skewed. The recovery is concentrated in premium segments, including jewellery, dining, beauty, and passenger vehicles. By contrast, mass consumption remains under pressure. Weak job creation and a sharp rise in borrowing against gold signal mounting stress in urban household balance sheets.

A key policy development for 2026-27 is a change in indirect taxation for tobacco products. With the GST compensation cess ending, the government has notified new tax rates for tobacco industry effective February 1. The effective tax rate on cigarettes is expected to rise by 15–20% due to the new excise and cess structure. While this could lead to a mild 10-15-basis-point uptick in inflation in the last quarter of 2025-26, the additional revenue may offset losses from other GST rationalisation measures and potentially support higher defence spending.

However, the government’s ability to drive growth through capital expenditure is diminishing. QuantEco projects central government capital-expenditure growth to moderate to 7–8% in 2026-27 from the budgeted 10.1% in the current year, as fiscal consolidation takes precedence over stimulus.

Despite the attention on consumption, manufacturing remains a weak link. The Manufacturing PMI fell to a two-year low towards the end 2025, and industrial production during the festive season lagged that of the previous year. On the investment front, the transition from public- to private-led capital spending remains incomplete. While early signs of a pickup in private investment are visible in stronger order inflows for capital goods and defence, a broad-based recovery remains elusive. Whether private investment can replace government spending as the primary driver of growth will depend heavily on the durability of consumption demand.

The external environment offers little respite. QuantEco highlights rising geopolitical fragmentation and the emergence of competing blocs as key risks. Merchandise exports to the US have already slowed amid growing protectionism. Services exports, however, continue to provide an important buffer, helping to keep the current account deficit at a manageable 1.2% of GDP in 2026-27.

Looking beyond near-term trends, 2026-27 will be a pivotal year for India's political economy. India is set to begin its long-delayed Census exercise in April, with population enumeration scheduled to start in 2027. This is not merely a statistical exercise; it will trigger the mandatory delimitation of parliamentary constituencies. This process could potentially shift political representation from southern to northern states because of divergent population trends, posing a sensitive challenge for federal cohesion and policy prioritisation.

QuantEco characterises 2026-27 as a year of consolidation rather than acceleration. With inflation projected to normalise at 3.9% and the Reserve Bank of India expected to remain on pause after delivering cumulative rate cuts of 125 basis points, the economy will lack the aggressive policy levers of the past two years. The central challenge will be to ensure that the rural recovery is sustained long enough to crowd in private investment in an increasingly fragmented world.