The first advance estimate of FY26 real gross domestic product (GDP) growth at 7.4 per cent, significantly above the 6-6.5 per cent forecasts made at this time last year, underscores the Indian economy’s resilience amid heightened global trade and policy uncertainty. In fact, there appears to be room for an upward revision, with our estimate pegged at 7.6 per cent.
A closer look at the growth drivers is instructive. Exports held firm at 6.5 per cent, while capex growth improved to 8 per cent, supported by the government’s sustained infrastructure push and demand stimulus, which in turn catalysed private capex in select sectors. Private consumption growth, however, moderated to around 7 per cent, reflecting a slowdown in rural demand and the agriculture sector. Overall, strong government spending and continued traction in services — both domestic and export-oriented—helped cushion the economy against external headwinds and preserved growth momentum in FY26.
As a result, India appears to be experiencing its own Goldilocks moment —robust growth alongside subdued inflation, which is projected to slip towards the 2 per cent mark this year (RBI estimates). That said, a key metric warranting attention is nominal GDP growth, which has declined to a multi-year low of 8 per cent as per advance estimates.
In the real world, nominal GDP matters more than real GDP for several business and policy outcomes, including tax collections, corporate earnings, and credit growth. Policymakers seem acutely aware of this, as reflected in the coordinated fiscal-monetary response: tax relief (GST and income tax), cumulative rate cuts of 125 basis points (bps), and unprecedented liquidity support.
From a fiscal perspective, nominal GDP growth is also critical in assessing deficit dynamics. Here, a gap has emerged vis-a-vis the Budget assumption of 10.1 per cent nominal growth, although subsequent data revisions have broadly preserved the absolute GDP size at around ₹357 trillion. We expect further revisions in the second advance estimate, coinciding with the base year revision to FY23 (2022-23), scheduled for release on February 27.
Looking ahead: FY27 macro outlook
Turning to FY27, consensus expectations point towards a continuation of the Goldilocks environment -- real GDP growth: 6.5–7.0 per cent; inflation: 3.5-4.0 per cent; nominal GDP growth: 10 per cent.
We broadly share this view. A cyclical recovery in demand, aided by the lagged impact of policy support, export diversification across tariff-affected sectors, structural reforms aimed at improving productivity and investment (notably labour reforms), and benign crude oil prices should collectively support a favourable growth-inflation mix in FY27.
However, caution remains warranted. The economy has just navigated a challenging year marked by a 50 per cent tariff hike by the US, significant foreign portfolio equity outflows, and underperformance across domestic markets — foreign exchange, rates, and equities. Early signals in the new year reinforce the reality of a world characterised by heightened uncertainty and power-based geopolitics. In this backdrop, continued fiscal-monetary coordination will be essential to contain market volatility.
Attention now shifts to the Union Budget, where commitment to fiscal prudence is expected to continue, alongside sustained momentum on productivity-enhancing and investment-oriented reforms — such as ease of doing business, deregulation, and factor-market reforms.
On the monetary front, we expect the RBI to deliver a final 25 bps rate cut, taking the terminal repo rate to 5 per cent, while ensuring that liquidity support remains adequate to facilitate effective transmission.
The writing on the wall is clear: FY27 will unfold amid significant global uncertainty. Achieving a repeat of FY26’s Goldilocks mix — strong growth with low inflation — will require continued policy vigilance and hard work. While the odds are favourable, navigating the turbulence ahead will test both fiscal and monetary stewardship.
The writer is chief economic advisor, Union Bank of India
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