India Stares At Difficult Days Ahead With Sharp Decline In Growth Rate In 2026-27

The preliminary version of the OECD Outlook released on June 3, 2026 has projected the real GDP of India to grow by 6.3% during the FY 2026-27, which is a sharp decline from the robust growth rate of 7.8 per cent year-on-year in the quarter ending in December 2025 (Q3 FY2025–26), easing from 8.4% in the previous quarter. However, it expects only a little improvement in the GDP growth in 2027-28 to 6.4 per cent.

Summing up the scenarios, the OECD Outlook stated that rising inflation is expected to weigh on private consumption, while investment slows amid higher oil and gas prices and gas rationing. Employment growth and labour market participation are set to weaken. Inflation is projected to increase to 4.8% in FY2026-27, driven by higher food, energy and fertiliser costs, and currency depreciation. The current account deficit is expected to widen, as higher energy import costs outweigh the impact of weaker domestic demand. More persistent energy rationing could lead to weaker growth.

High-frequency indicators, including softer industrial production, suggest a loss of momentum of India’s growth rate. Retail indicators and survey-based measures of consumer sentiment point to an easing of private consumption as higher food and energy prices weigh on households’ real purchasing power.

At 3.5% year-on-year in April, headline inflation has picked up since early 2026, driven primarily by food prices, but core inflation has remained broadly stable and below the mid-point of the central bank’s target band of 4% ± 2%.

The depreciation of the rupee relative to the US dollar of around 7% since the beginning of the year has added to inflationary pressures by raising import costs, particularly for fuel and fertilisers, with partial pass-through to consumer prices.

Labour market conditions are softening, with the workers population ratio declining from 40.5% in December to39.5% in April.

India’s crude oil and natural gas dependence on the Middle East is substantial, with crude oil imports accounting for about 46% of total imports in 2024 and natural gas for about 57%. Energy import prices have risen sharply in recent months, but only part of that has fed into domestic energy prices.

Reductions in excise duties on petrol and diesel and the removal of import duties on selected petrochemical inputs, alongside export levies on refined products, have helped to contain the pass-through from international prices to domestic inflation.

Rationing measures have prioritised natural gas supply to households and transport, while expanding access to kerosene through the public distribution system and increasing the availability of small LPG cylinders for migrant workers. The recent reduction in US import tariffs lowered the average effective tariff rate on India by 23 percentage points, reducing pressures on exporting sectors.

The Reserve Bank of India reduced the monetary policy rate from 6.5% in January 2025 to a broadly neutral level of 5.25% in February 2026 and average lending rates have fallen. Non-food bank credit (bank credit net of food procurement-related lending) expanded by 15.9% year-on-year in March.

However, the outlook says that recent developments point to a re-emergence of inflationary pressures. Headline inflation has begun to rise, driven primarily by higher food prices as favourable base effects fade. Higher oil and gas prices are adding both direct and indirect pressures, increasing transportation and production costs across sectors.

The depreciation of the rupee is further amplifying imported inflation by raising the domestic cost of fuel, fertilisers and other tradable goods. In this context, a temporary increase in the policy rate of around 25basis points is projected by the end of the first quarter of FY2026-27 to help maintain inflation within the4% ± 2% target band and anchor expectations. As inflationary pressures recede over the projection horizon, monetary policy is expected to ease in FY2027-28.

Fiscal policy is projected to become expansionary in FY2026-27 to cushion the impact of higher energy prices. The FY2026-27 budget envisaged a reduction in the fiscal deficit from 4.4% of GDP in FY2025-26 to 4.3% of GDP. However, measures adopted to mitigate the energy price shock are expected to widen the deficit by around 0.4% of GDP relative to the budgeted path.

OECD outlook says that these measures will provide near-term support to household real incomes and limit the impact on consumption but will also slow the pace of public debt reduction, which is expected to reach 54.7% in FY2027-28. Fiscal policy is expected to return to a moderate consolidation path in FY2027-28 as energy prices stabilise and temporary support measures are phased out.

The negative effects of higher energy prices and gas rationing, weaker global demand and higher production costs are expected to weigh on investment and exports, despite lower US import tariffs providing some support to exports. Private consumption growth is projected to slow as inflation reduces households purchasing power.

As some of these headwinds recede in FY2027-28, growth is expected to recover to 6.4%. Inflation is projected to rise to 4.8% in FY2026-27, driven by higher food and energy prices and exchange-rate depreciation, before easing in FY2027-28 as commodity prices stabilise and monetary policy tightens. The current account deficit is expected to widen in FY2026-27, reflecting higher energy import costs and weaker external demand.

Risks are tilted to the downside. Persistent disruptions to energy supply, including prolonged gas rationing, could further constrain production and raise inflation, including through reduced fertiliser supply and agricultural output. Trade policy uncertainty remains elevated, and additional restrictions or weaker global demand could weigh on exports and investment.

On the upside, if energy support measures effectively reduce near-term inflation and limit the erosion of real disposable incomes more effectively than assumed in the projections – particularly for liquidity-constrained households – private consumption may prove more resilient than projected.

Energy support could cushion real incomes and consumption more than expected, the outlook said, adding that India’s fiscal policy is poised to turn expansionary in FY2026-27 to mitigate the impact of higher energy prices, notably through subsidies. Moving from price support to targeted transfers could reduce the fiscal cost of policy support.

Following a period of easing, monetary policy is projected to tighten with a policy rate increase in early FY2026-27 to help keep inflation within the target band. Streamlining and harmonising regulations would reduce administrative burdens, boosting productivity and investment. Accelerating the rollout of renewable energy sources would strengthen energy security and reduce carbon emissions.

India’s energy support measures have largely relied on broad-based, price-distorting interventions rather than targeted assistance, the OECD outlook said. This approach has high fiscal costs, slowing the rebuilding of buffers. Direct transfers to vulnerable households and viable firms would achieve similar objectives at significantly lower fiscal cost.

Expanding renewable energy sources, while strengthening grid infrastructure and storage capacity, would make growth more sustainable by reducing carbon emissions and at the same time reduce the reliance on imported energy. However, regulatory complexity and overlapping administrative requirements across central and state levels continue to raise compliance costs, delay project implementation and deter investment, particularly in manufacturing and infrastructure. Streamlining and harmonising regulatory frameworks, expanding single-window clearance systems, digitalising approvals and setting clear administrative deadlines would reduce uncertainty and improve transparency. (IPA Service)