A Silver Lining Awaits The Slow Pace Of GDP Growth

The country’s GDP is projected to grow by 6.5 per cent in FY26, thanks to recovery in domestic consumption and investment even as exports of goods face challenges. It will possibly be subject to a pick-up in domestic consumption and investment activity. Rural demand is likely to remain upbeat in the near term, aided by farm cash flows from rabi harvest and above-normal reservoir levels, which can provide some insurance against a delayed start or inadequate rainfall in the early part of the monsoon season. However, beyond July, a normal and well-distributed monsoon remains the key to support farm sentiments and incomes. Urban consumption, which has been sluggish in the ongoing fiscal, is poised to improve in the next fiscal. This stems from the fact that this is supported by favourable developments, including income tax relief announced in the Union Budget, the onset of rate easing cycle and expectations of moderation in food inflation.

Additionally, investment activity will be supported by the healthy expansion in the Centre’s capex, continuation of capex loans to state governments and healthier outlook for housing demand vis-à-vis FY25, auguring well for construction activity and the GDP growth. However, private capex may remain measured and non-exuberant amid external headwinds. Overall, Icra projects GDP at basic prices to grow by 6.5 per cent from 6.2 per cent in Q3, in FY26. Nevertheless, the impact of sustained exchange rate depreciation on the profitability of some corporates and external headwinds related to tighter trade policies poses key downside risks to the outlook. The current GDP growth at 6.2 per cent is backed by higher consumption, primarily led by the government, while capital formation was stable compare to the previous quarter. The private sector value-added growth has also improved from the previous quarter’s, albeit with the manufacturing sector remaining frail. For the outgoing year, NSO’s second estimate of GDP growth is 6.5 per cent. However, enormous upward revisions for the past two years have led to post-Covid CAGR, which is now at five per cent.

That said, NSO’s implied FY25 growth at 7.6 per cent appears to be a tall order, especially with implied Q4 private consumption growth at 9.9 per cent, and the implied wedge between GDP and GVA growth at a massive 70bps. Experts are cognizant of the tepid private economic agents in the current cycle and are keeping a watch on global headwinds, which could pressure growth. Emkay believes that this is slightly on the higher side given the global uncertainties surrounding merchandise exports and commodity prices. Urban consumption is set to improve in FY26, supported by favourable developments, including income tax relief announced in the Union Budget, among others. Nevertheless, the impact of sustained exchange rate depreciation on the profitability of some corporates and external headwinds related to tighter trade policies poses key downside risks to the outlook. Consequently, for the full-year, analysts expect the GDP growth to be around 6.3-6.5 per cent.