The FY26 income tax cut, and GST Ratings reductions.
MUMBAI: India Ratings has projected India’s economy to grow 7.4% in the current fiscal year, before moderating to 6.9% in FY27, supported by domestic policy reforms that are expected to cushion the impact of multiple global challenges. These include steep US import tariffs and a weakening rupee, which the agency expects to average ₹92.26 per dollar in the next fiscal year.
“The economy is expected to expand by 6.9% in FY27, compared with 7.4% this year. Domestic reforms such as the income tax relief announced in the FY26 Budget, recent GST rate cuts, and free trade agreements with countries including Oman, the UK and New Zealand should help India navigate global uncertainties, particularly those arising from higher US tariffs,” said Devendra Kumar Pant, Chief Economist at India , during a media briefing on Tuesday.
Ratings outlook is subject to several downside risks
However, Pant cautioned that the outlook is subject to several downside risks. These include the possibility of an El Niño weather pattern from mid-2026, continued pressure on the rupee due to weak capital inflows, subdued global trade growth, a high base effect from strong FY26 performance, and slower growth in GST collections. He also flagged artificial intelligence as a potential emerging challenge.
Pant noted that risks to the FY27 growth outlook are broadly balanced. Faster progress on a trade agreement with the US and a favourable Indian Ocean Dipole could help offset the adverse impact of El Niño and push growth above current estimates. Conversely, a weaker-than-expected recovery in consumption and investment could lower growth. While rural demand has remained resilient, urban consumption continues to lag, he said.
On the currency front, Pant expects further depreciation in the rupee after it declined more than 5% in 2025, with the currency likely to average ₹92.26 in FY27, compared with ₹88.64 in FY26 and ₹84.58 in FY25.
Although five consecutive quarters of agricultural gross value added growth above 3.5% and easing inflation in FY26 have improved prospects for sustained consumption, government consumption spending has remained restrained due to ongoing fiscal consolidation.
Key drivers of consumption demand include robust services-sector growth, low inflation supporting positive real wage growth, income tax relief announced in the FY26 Budget, and GST rate cuts, Pant said.
Inflation is expected to remain benign through the rest of FY26 and into FY27. Stable agricultural output and low inflation should keep rural real wages positive, while easing price pressures are also expected to support growth in real urban wages. Real wages in non-financial private corporations are projected to improve from current levels.
Tax relief measures and GST cuts are expected to boost disposable
Tax relief measures and GST cuts are expected to boost disposable incomes and help sustain consumption growth. On the investment side, India Ratings projects gross fixed capital formation (GFCF) to grow 7.8% in FY27, up from 7.4% in FY26 and 7.1% in FY25, driven largely by continued government capital expenditure.
While sectors such as telecom, chemicals and garments may see some moderation in investment, capex momentum is expected to remain strong in power (both thermal and renewable), transmission and distribution, logistics, warehousing, and commercial and retail real estate, particularly in urban centres.
Final word
Pant said the actual impact of the 50% US tariffs appears to be lower than initially estimated. He cited IMF projections that global growth will hold at 3.2% in 2025, compared with 3.3% in 2024. Meanwhile, the US weighted average import tariff rose sharply to 18.55% by December 2025, from 2.56% at the start of the year.
For India, the weighted average tariff increased to 38.67% by December 2025, affecting exports worth about $74.3 billion. Globally, trade worth nearly $2.7 trillion has been impacted by the tariff hikes, which are unlikely to be fully rolled back even under a trade agreement.
India Ratings expects inflation to remain within the RBI’s target range in FY27, with average CPI inflation at 3.8% and WPI inflation at 2.3%.
