Economic outlook in 2026: Indian economy neutralized global uncertainties in 2025; what’s expected in the coming year?
By DK SrivastavaThe first and second quarter 2025-26 real GDP growth rates at 7.8% and 8.2% respectively provide a post-Covid robust growth performance. The full year growth is expected to be more than 7%. The RBI has revised its full year growth estimate upwards to 7.3%. Considering the post-Covid period while leaving out 2021-22 that was characterized by strong base effects, real GDP growth during 2022-23 to 2024-25 averaged 7.8%. This is more than double the global growth during 2022 to 2024 at 3.5%, indicating that India has exhibited a high and stable growth performance and the strongest post-Covid economic recovery among major economies. For the first half of 2026-27, the RBI assesses a growth of 6.8%. The full year growth is likely to be in the range of 6.5-6.8%. The IMF’s medium term growth projection for India is also 6.5% over the period 2027-28 to 2030-31. Thus, India’s growth story is likely to remain intact in spite of global supply chain and tariff uncertainties. CPI inflation in India has remained benign during 2025-26. The RBI has assessed a CPI inflation of 2% for this fiscal which is the lower bound of the Monetary Policy Committee’s inflation tolerance range. With inflation remaining contained, the RBI has been able to reduce the repo rate by 100 basis points in 2025-26 from 6.25% to 5.25% in three installments of 25, 50 and 25 basis points introduced in April, June and December 2025 policy reviews. Along with RBI’s growth-oriented policy, one can look forward to a complementary growth push through the union budget for 2026-27. The GoI has ensured a frontloading of its capital expenditure in the first seven months of 2025-26 with a growth of 32.4% as against a budgeted growth of 10.1% over the 2024-25 revised estimates. In the first half of 2025-26, a robust growth in private final consumption expenditure (PFCE) at 7.5% has been recorded. For this, lower inflation and interest rates, and higher household disposable income resulting from PIT rationalization have played a significant role. The expectation is that the growth momentum for PFCE would be further supported by the extensive rate reductions under GST 2.0.The November 2025 GST data however show a reduction of Rs 11,993 crore in gross collections and of Rs 10,931 crore in net collections as compared to November 2024. This revenue reducing effect of GST reforms is likely to continue in the remaining months of the fiscal year. According to CGA data, growth in GoI’s GST revenues considering the sum of CGST, UTGST and IGST for the first seven months was only 2.6%. Juxtaposing this with a nominal GDP growth of 8.8% for the first half of 2025-26, the implied GST buoyancy for the GoI is only 0.3 as against a budgeted buoyancy of 1.1 over the revised estimate (RE) of 2024-25. GoI’s gross tax revenue (GTR) showed a growth of 4% during April-October 2025-26 as against a budgeted annual growth of 10.8% over the 2024-25 RE. Although five months in the fiscal year remain, there is an expectation of a shortfall in the GTR collections as compared to the budgeted magnitude. If an impact on fiscal deficit is to be avoided, a corresponding reduction in the budgeted revenue expenditures of the GoI would be called for. There would be some support to revenues due to higher than budgeted receipts on account of RBI dividends and revenues that are likely to be raised under the newly introduced excise duties on tobacco and tobacco products and health and national security cess on manufacturers of pan masala and any other sin goods that may be specified by the central government. At any rate, the fiscal consolidation path should be adhered to. Further, the momentum of capital expenditure growth needs to be maintained for the balance of this fiscal year. The momentum with respect to these two fiscal trends needs to be continued into the next fiscal year in order to sustain the growth momentum. Overall, in 2025-26, the domestic economy with adequate support from monetary and fiscal policies has effectively neutralized any adverse impact of global uncertainties. These factors would continue to remain effective in 2026-27. DK Srivastava is Chief Policy Advisor at EY India. Views expressed are personal.
