CLSA projects 6.9% GDP growth for FY26 as domestic demand offsets spending cuts and global trade headwinds; rate cuts, GST reforms, and valuation resets to shape the outlook.
GDP Growth to Moderate to 6.9% in FY26
India’s economy is expected to expand at a slightly slower pace in FY26, with GDP growth projected at 6.9%, according to Leif Eskesen, Chief Economist at CLSA.
- The projected figure is just shy of the 7% mark, reflecting a mild deceleration from earlier momentum.
- Eskesen attributes the slowdown to government spending cuts and weaker global trade, both of which are expected to weigh on economic activity in the coming quarters.
Fiscal Discipline to Constrain Government Spending
A key reason for the expected moderation is the government’s commitment to meeting its fiscal deficit target.
- “There will be some slowdown in government-led infrastructure-type investments,” Eskesen said.
- This fiscal tightening is seen as necessary but will likely act as a drag on growth in the short term.
With elections behind, a more cautious fiscal approach is expected in the second half of the fiscal year.
Global Trade Softness Adds to Pressure
External conditions are also expected to play a role in dampening growth:
- Lag effects of U.S. tariffs continue to impact India’s export performance.
- The outlook for global trade remains subdued, limiting potential growth from external demand.
Eskesen cautioned that these headwinds may persist into the coming quarters.
Domestic Demand May Cushion Slowdown
Despite the macro pressures, Eskesen believes domestic consumption could remain resilient:
- Recent GST reforms are expected to support consumption, particularly in the informal sector.
- As reforms take effect, spending patterns may improve, providing a demand-side buffer against fiscal and external drags.
This could help India outperform other major economies even in a moderated growth environment.
Foreign Inflows to Revive After Valuation Reset
On capital markets, Eskesen highlighted that India’s high equity valuations and overbought domestic positioning have constrained foreign investor flows in recent months.
- A healthy correction in valuations is seen as necessary for renewed FPI interest.
- A potential U.S. market correction, which Eskesen described as likely given “frothy” valuations, could weigh on global risk appetite.
“Indian equities won’t escape a U.S. correction,” he warned, signaling the need for investors to brace for short-term volatility.
RBI Expected to Cut Rates Gradually
Monetary easing is on the horizon, but Eskesen ruled out any aggressive moves:
- He expects the RBI to cut rates by 25 basis points in December, with a second 25-bps cut in the following meeting.
- Despite recent inflation concerns, core inflation remains near target, reducing the case for a larger 50-bps cut.
The forecast reflects a measured policy stance, balancing inflation management with growth support.
