India's economy to hold top spot for growth, but underlying weaknesses remain

Reuters

3 days ago

BENGALURU, June 27 (Reuters) - The Indian economy will grow at a mostly steady pace this fiscal year and next after marking a four-year low in 2024-25, according to economists polled by Reuters, who have mostly either kept their forecasts unchanged or made marginal upgrades.
That stable outlook comes despite the Reserve Bank of India cutting interest rates by a full percentage point since early this year, including an unexpected 50 basis point reduction on June 6, to boost growth in the face of rising global uncertainties.
But the world's fastest-growing major economy still earns that title mostly because government capital expenditure remains strong.
Gross domestic product was forecast to expand 6.4% in the current fiscal year ending March 2026, the June 17-26 Reuters poll of 51 economists found.
That is weaker than 6.5% reported for fiscal year 2024-25, which was the slowest since 2020-21. Growth was forecast to pick up modestly to 6.7% in FY 2026-27.
That marks a slight upgrade from last month's poll, which had medians of 6.3% and 6.5%, respectively.
"Most of the growth that was happening was mainly because of the capital expenditures of the government, which will flatten out," said Indranil Pan, chief economist at Yes Bank.
Private sector spending is still trailing far behind, and analysts generally agree the economy is still failing to create enough quality jobs for its large young population.
"One of the biggest challenges for India at the current juncture ... is per capita income. Job creation has not been strong enough to generate the income needed to support sustainable economic growth," Pan added.
Some economists said there may be downgrades to the GDP outlook in the coming months if New Delhi fails to secure a trade agreement with Washington before the 90-day pause on tariffs comes to an end on July 9.
Trade talks between the two sides have stalled over auto parts, steel and farm goods, Indian officials with direct knowledge told Reuters on Thursday, dashing hopes of a deal ahead of U.S. President Donald Trump's deadline to impose reciprocal tariffs.
But ANZ economist Dhiraj Nim wrote they have upgraded their FY 2026 growth forecast on hopes that the two countries would reach a trade deal.
"Even so, growth will remain below potential in a challenging global environment, warranting policy support," he added.
The RBI shifted its policy stance to "neutral" from "accommodative" on June 6, signalling a likely end to its shallowest rate-cutting cycle in over a decade.
But economists are divided on whether there would be a long pause or another 25-basis-point cut in the final three months of the year.
Just over half of respondents - 28 of 53 - expected the repo rate to stay at 5.50% in the fourth quarter, while the rest forecast it at 5.25% or lower.
Consumer inflation was expected to average 3.6% this fiscal year before rising to 4.3% next year, the poll showed.
(Other stories from the June Reuters global economic poll)