As FY25 comes to an end, it is always interesting to conjecture on a practical basis what FY26 would look like. The Indian economy has done rather well in FY25, though the turbulence following Donald Trump taking over as president and talking tough on tariffs has affected financial markets across the world. There is apprehension about what could happen, and until there is clarity, markets will be jittery. Given this background, the following looks likely to be the state of economic affairs in the country.
The overall growth would be stable and move slightly higher in FY26. The main reason is that India is basically a domestic oriented economy where demand is driven by home factors. Therefore, while any hit in foreign trade due to tariffs will affect exports, the impact on the GDP growth would be limited and not be more than 0.2%. Hence, a growth of around 6.6-6.8% would be a conservative estimate for this year. That said, there would be certain sectors at the micro level which will bear the brunt of tariffs as exports get affected. This would be mainly readymade garments, pharma, electronics, engineering and precious stones. These segments would have to be monitored closely for possible impact on exports.
Consumption should be better this year. This would be on account of two factors. First, the government has announced in its budget that there would be a revenue loss of Rs 1 lakh crore due to the income tax benefits being given, which intuitively means more money in the pocket. While a part would be saved, there would be a larger amount spent. Therefore, there is reason to be sanguine. Second, with inflation coming down, the real purchasing power would improve, leading to higher consumption. While the overall impact may not be one to warrant acceleration, it would mean a gradual upward movement.
Investment so far has been mainly sponsored by the government at the central and state levels. The common explanation given is that when there is excess capacity, especially in the consumer goods segments, there is less incentive to spend more on investment. As consumption picks up, there will be better utilisation of capacity, which, in turn, will lead to upward movement in private investment. This would be good news for the overall growth as well as markets.
Inflation would be another positive factor, assuming that the monsoon is normal. Inflation would be averaging 4.7% in FY25 and has been high mainly due to higher food inflation. With food inflation coming down, there would be a positive impact on prices in FY26. The non-food inflation, also called core (which excludes food and fuel), has been stable at 4%. This will mean that there will be few inflationary pressures on the domestic front. The global political situation may not improve, but the crude oil price will probably remain stable in the range of $70-80. This will be partly also due to the demand being lower, given that the global growth is expected to be impacted more by the tariff talk.
Lower inflation will also mean that the RBI will continue to lower interest rates. While the repo rate may be expected to go down to 5.75% by December, it will be driven by data. From the point of view of a saver, the peak rate regime is over. For borrowers, the path of movement has to be monitored. The pattern of the monsoon will be critical in terms of how the RBI lowers the repo rate. The arrival, spread, and intensity of the monsoon are important here, as the RBI tends to be more circumspect around this time of the year to gauge the possible impact of the rains on farm production and inflation. It has been seen that the TOP problem (tomatoes, onions and potatoes prices) has become an annual one due to seasonal changes, which affects these crops during September-October. These prices have the potential to skew food inflation quite sharply.
While all these signals are positive, there are others which would be hard to predict at this stage. First is the state of markets. While improvement in the economy should ideally also be reflected in better earnings of companies, the global factor is hard to predict. Today, the FPI flows have been erratic, based on how strong the articulation of various countries is regarding US policies. This will continue to be uncertain for sure, and hence, the stock market will be hard to conjecture. But given that the Trump tariff issue did lead to markets bottoming out at around 75,000 for the Sensex, an upward movement can be expected.
Second, the value of the rupee would also be guided to a large extent by the global factor. It has been observed that the dollar has been swinging from getting ‘stronger’ to ‘weaker’ based on actions taken by the US on tariffs. The Federal Reserve has also indicated that it will be more in the wait-and-watch mode before going aggressively on rates. A stronger dollar can pull down the rupee, and this is something which ideally should not be the case. But withdrawal of the FPI and a possible higher trade deficit can put pressure on the rupee. Therefore, a range of Rs 86-87/$ looks a fair range as of the present.
Third, the issue of job creation will be interesting. The EPFO data does show that more numbers are being added, which should continue. However, in the organised sector, several companies have announced reductions in staff count in domains such as auto and IT. The threat here is more from the technology side, with the proliferation of AI in several businesses. The logistics and construction industries have added to the headcount in the private sector, though the challenge here is that these jobs are not high-paying. This becomes important in the context of consumption, as such jobs do not give the power of ‘discretionary spending’, which is what the economy requires.
Hence, the overall emerging picture will be one of a resilient economy with a few clouds of uncertainty, especially so as, in a globalised set up, there are bound to be external influences.
The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal.
