Consumption, Tax Cuts to Drive India’s 6.5% GDP Growth in FY26, Says S&P

India’s economy measured by the real gross domestic product (GDP) is estimated to have grown at the fastest pace in five quarters at 7.8 per cent in the April to June period of the current fiscal year. The official data for Q2 (July-September) GDP growth estimates is likely to be released on November 28.

“We anticipate that India’s GDP will grow by 6.5 per cent in fiscal year 2026 (ending March 2026) and 6.7 per cent in fiscal 2027, with risks evenly balanced. Domestic growth remains robust, driven by strong consumption, despite the impact of US tariffs,” S&P said in its Economic Outlook Asia-Pacific report.

Recently, the Reserve bank has projected India’s GDP growth in the current fiscal year at 6.8 percent, better than 6.5 per cent expansion in last fiscal year. “If India can secure a trade agreement with the US, it will reduce uncertainty and enhance confidence, which would boost labour-intensive sectors,” S&P said.

“Lowered goods and service tax (GST) rates will support middle-class consumption and complement income tax cuts and interest rate reductions introduced this year. These changes are likely to make consumption a greater driver of growth compared with investment, in this fiscal year, and the next,” the rating agency added.

The government in Budget for the fiscal year (2025-26) has hiked I-T rebate to Rs 12 lakh, from Rs 7 lakh, which gave tax relief of Rs 1 lakh crore to the middle class. Besides, the RBI in June had cut key policy rates by 50 basis points to a 3-year low of 5.5 per cent.

S&P further said that the spike in the effective US tariff on India is weighing on the expansion of export-oriented manufacturing in the country, but there are signs the US may lower tariffs on Indian products. “The new approach of the US to trade policy is causing governments and firms to spend time and money on negotiating for exemptions, consequently diverting attention from efforts to raise productivity,” the rating agency said.