Economics - FY26 GDP growth holds up, but risks loom in FY27 by Elara Capital
India's Q4FY26 GDP growth surprised on the upside, rising 7.8% YoY, driven by robust services activity and healthy manufacturing growth suggesting that impact of West Asian crisis on economic activity was negligible in March-2026 Real GVA grew 7.9% YoY in Q4FY26, led by 9.9% YoY and GST cuts and government’s infrastructure spending. Consequently, FY26 GDP growth came in at 7.7% YoY, 10bps above the CSO's second advance estimates. Hereon, sustaining this momentum in FY27 appears challenging amid the ongoing West Asian conflict led surge in energy prices and supply-chain disruptions, and sub-normal monsoon and El Nino . We expect GDP growth to moderate to 6.6-6.7% in FY27E, broadly in line with the RBI's 6.6% projection, with risks tilted to the downside if geopolitical tensions prolong beyond Q1FY27.
Resilient FY26 growth, but FY27 to be tough: India's GDP growth accelerated to 7.7% YoY in FY26, above the 7.1% average recorded over the previous two years under the new GDP series. The improvement was led by a recovery in domestic demand, with core GDP (PFCE + GFCF) rising 7.9% YoY versus 6.1%YoY in FY25. Private consumption rebounded to 7.7% YoY from 5.8% YoY in FY25, supported by government spending and GST rationalization. However, the shares of PFCE (55.7% of GDP) and GFCF (32.3% of GDP) were largely unchanged, suggesting that the pickup reflected cyclical demand recovery rather than a structural shift in the economy.
While FY26 reflects strong underlying momentum, sustaining similar growth in FY27 will be challenging. The RBI has projected FY27 GDP growth at 6.6%, reflecting elevated energy prices, supply-chain disruptions and a weaker global backdrop amid the ongoing West Asia conflict. Although domestic demand is relatively resilient, higher input costs, rising freight charges and logistical disruptions are likely to weigh on activity in the coming quarters. In our view, the combined impact of elevated energy prices, supply-chain bottlenecks, tighter financial conditions and lingering tariff-related uncertainty may keep growth in the 6.5–6.7% range in FY27E, with risks tilted to the downside.
Services continued to anchor domestic demand: The services sector remained the main driver of economic activity in FY26, expanding in all four quarters despite rising geopolitical uncertainty toward the end of the fiscal year. Services GVA grew 9.9% YoY in Q4FY26, above the two-year average of 8.2% YoY for the corresponding quarter.
Strong momentum across freight, digital services, e-commerce, entertainment, IT services and air travel in Q4FY26 suggests that consumption-oriented and service-intensive segments of the economy remained largely insulated from external shocks. The transport sector also remained resilient, with international air passenger traffic and cargo handling rising 11.1% YoY, while passenger km increased 4.5% YoY.
Looking ahead, the services sector may continue to remain key driver of India’s growth, although momentum may moderate in FY27. The escalation of the West Asia conflict, along with precautionary measures such as work-from-home advisories, restrictions on non-essential travel and higher fuel costs, may temporarily hit mobility-driven services such as tourism, hospitality and transportation, while also weighing on discretionary spending.
Q4FY26 GDP print – Key highlights: Consumption remained supportive in Q4FY26, with real PFCE rising 7.1% YoY and accounting for 56.6% of GDP, up from 5.6% YoY growth in the same quarter last year. This strength was supported by lower inflation, continued momentum of GST cuts and resilience in rural demand. The capex share of GDP (GFCF) was 31.8%, below the 11-quarter average of 32.1% as private sector activity remained soft. Net exports in Q4FY26 rose to INR 0.9tn from INR 0.6tn in Q4FY25, likely supported by sharp depreciation of the Rupee and some recovery in exports after removal of elevated tariffs on US exports. On the activity side while services growth rose to a robust 9.9% vs 6.8% in Q4FY26, industrial GVA growth slowed to 7.3% YoY from 10.0% YoY in Q4FY25, largely due to weaker manufacturing activity, which was disrupted in Mar-26 amid supply shortages.
Outlook – We retain GDP growth projection at 6.5-6.7% for FY27E: High-frequency indicators signal that India's economic activity is losing momentum at the onset of FY27, with several consumption and manufacturing indicators softening — a cautious read heading into the new fiscal year. Elevated energy prices remain a key risk, as disruptions to global supply chains and lower energy-related shipping activity could translate into higher input costs and inflationary pressures. Mobility indicators have also softened, reflecting the impact of precautionary measures and weaker travel activity. At the same time, the emergence of El Niño conditions pose additional upside risks to inflation, potentially weighing on household purchasing power. While, our analysis suggests that impact of El Nino on agriculture GVA and demand has weakened over the years amid more rainfall resilient agriculture activity credit flow to rural India. Tighter financial conditions and lingering trade-related uncertainties are likely to act as a drag on growth. We expect FY27E GDP growth to moderate to 6.5-6.7%, broadly in line with the RBI's projection of 6.6%, with risks tilted to the downside should geopolitical tensions and energy market disruptions persist longer than anticipated.
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