Government capex, private investment to drive India`s growth in FY 26
The Indian economy is expected to clock 6.5 per cent growth in 2025-26, driven by government investment in big infrastructure projects, and an acceleration in private investment during the year, according to the latest EY Economy Watch report.
The report highlights the importance of government expenditure on infrastructure expansion, which has a relatively larger multiplier, while pointing out that India is also likely to benefit from the expected lower global energy prices.
It is also expected that the RBI’s policy interest rate may be lowered by another 50-75 basis points during the course of FY26. This may be facilitated by a lower trajectory of CPI inflation, which has already fallen below 4 per cent in February 2025. This has happened for the first time since August 2024. As a result, private investment may also start picking up, the report observed.
On the global front, the report observed that the OECD, in its Interim Economic Outlook, projected global growth to slow to 3.1 per cent in 2025 from 3.2 per cent in 2024, with growth in the US economy moderating to 2.2 per cent from 2.8 per cent. The likelihood of the US economy going into a short-term economic slowdown, if not an outright recession, is quite strong. This is likely due to the anticipated negative effect on aggregate demand of recent US government spending cuts and employee salary reductions. As cost-cutting measures take effect, particularly the expected fall in energy prices, both domestically within the US and globally, the US economy is likely to start to gradually improve.
The Indian economy has already been facing significant uncertainties on account of the global slowdown and supply chain disruptions. Their impact on India’s export prospects may remain unpredictable until the mutual tariff levels settle down. A suitable policy for the Indian economy may be for the government to continue to rely on infrastructure expansion, the EY report observes.
EY India’s Chief Policy Advisor, D.K. Srivastava, said India’s changing demographic structure, with a rising working-age population, could drive a virtuous cycle of growth, employment, savings, and investment.
To capitalise on this, India may need to gradually increase spending on health, education, and infrastructure while ensuring adequate funding for low-income states through equalisation transfers.
