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We raise India’s FY26 GDP growth forecast to top-of-the-street 7.2% YoY. Simultaneous fiscal and monetary tightening hurt growth in FY25. While we expected the monetary easing and slower pace of fiscal tightening to help growth in FY26, GST cuts and earlier-than-expected revival in credit growth have boosted high-frequency indicators. We also expect better growth in FY26 to push up trend-growth assumptions, which have been depressed by slowing nominal growth. Inflation should rise as unnaturally low food prices reverse and economic slack eases. Low costs of equity and debt capital and the deregulation drive at the centre, state, and regulators should help sustain this growth.
Raising FY26 GDP growth to 7.2%, as GST reset helps monetary transmission
We have long held that in the absence of the fiscal and monetary headwinds that slowed GDP growth in FY25, FY26 would see a revival, as trend growth is faster. Data and anecdotes post the GST changes point to an improvement in growth momentum in October, and credit growth has revived two months ahead of our earlier expectation, with rising disbursals on past sanctions. Healthy growth in high-frequency indicators in proxies for construction (good cement demand), transport (auto sales), and labour markets (low NREGA demand, drop in PLFS unemployment) show the fiscal impulse was effective. We raise our projections of real FY26 GDP growth to above-consensus 7.2%.
Falling cost of capital, EODB steps are growth enablers
Cost of capital has been falling, with sovereign bond yields near record lows (excluding crisis periods), and high P/E multiples offering cheap equity capital. We expect the temporary tightening of liquidity due to FX defence, demand for currency notes and higher bank profitability to reverse. Both the centre and state governments are also working on ease-of-doing-business (EODB), supported by regulators focusing on removing bottlenecks, and undoing rules which were written in a different context.
Growth recovery can also move up trend growth estimates
After a prolonged period of downgrades, GDP upgrades have started, largely as expected. Early upgrades were mostly due to the 1Q growth surprise: even the MPC’s upward revision for FY26 had cut growth forecasts for 2-4QFY26. A steady deceleration in nominal growth was a driver, showing in weak tax collections and earnings growth. However, this was only due to lower inflation, driven by the (likely unrepeatable) largest and longest food price drop in 10 years, and slack in the economy. We expect both to, pushing nominal growth back to double-digits. Growth upgrades for FY26 are likely to push up trend growth assumptions as well, in our view.
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