EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
Recent Searches
How Union Budget 2026 can strengthen the foundations for sustained medium-term growth.
In brief
- RBI and ADB estimate India’s FY26 economic growth prospects at 7.3% and 7.2%, respectively, in the background of a robust first half real GDP growth of 8%.
- Subdued inflation trends leading to a low nominal GDP growth may have implications for Budget 2026 fiscal aggregates.
- Any pressure on GoI’s Gross Tax Revenues (GTR) may need to be balanced by reduction in revenue expenditures.
Economic growth and inflation performance and prospects
Asian Development Bank (ADB) has raised India’s FY26 real GDP growth forecast to 7.2%, an increase of 70 basis points from its previous forecast of 6.5% (September 2025). This upward revision was largely due to the robust growth of 8% that India has achieved in 1HFY26. This is also in line with RBI’s upward revision of FY26 real GDP growth to 7.3% in its December 2025 monetary policy review. The ADB has assessed that India is well placed to support the growth performance of Developing Asia and the Pacific region.
Recent NSO data for 2QFY26 highlighted the sectorally balanced growth profile where both manufacturing and the services sectors showed near equal growth at 9.1% and 9.2%, respectively, leading to an overall real GDP growth of 8.2% in this quarter. Even on the demand side, growth was supported in a balanced way by private consumption and overall investment with private final consumption expenditure (PFCE) and gross fixed capital formation (GFCF) growing at 7.9% and 7.3%, respectively, in 2QFY6.
CPI inflation in India has remained benign during FY26. The RBI has assessed a CPI inflation of 2% for this fiscal, which is the lower bound of the Monetary Policy Committee’s (MPC’s) inflation tolerance range. This low inflation had provided the room for a 25-basis point reduction in the repo rate which took effect in December 2025, thereby lowering it to 5.25%. This may have a positive impact on private investment.
With CPI as well as WPI inflation levels keeping low at 2.2% and 0.1%, respectively, in 1HFY26, nominal GDP growth for this period is estimated at 8.8%, implying a subdued implicit price deflator (IPD)-based inflation of about 0.7%. The below-trend nominal GDP growth has implications for fiscal aggregates which are specified in nominal terms.
GST reforms and revenue prospects
Controller General of Accounts (CGA) data indicated GoI’s GTR growth of 2.8% in 1HFY26 and 4.0% in the first seven months of FY26. Corporate Income Tax (CIT) revenues showed a growth of 5.2%, and Personal Income Tax (PIT) and GST revenues showed respectively growth rates of 6.9% and 1.2%(1) during April-October FY26. These low growth rates may be attributable to PIT reforms in Union Budget FY26 and GST reforms after presentation of the Budget. The rate reducing effect of CIT reforms introduced in FY20 have continued since then. For 1HFY26 the GTR buoyancy is only 0.32 as against a budgeted buoyancy assumption of 1.1.
For meeting the budget GTR growth target of 12.5% over FY25 CGA actuals, a growth of 22.3% would be required in the remaining five months of the current fiscal year. Part of this gap, however, would be made up because of a robust performance of non-tax revenues which grew by 22.5% during the first seven months of FY26. Also, two revenue enhancing measures have recently been announced relating to excise duty on tobacco products and national security and public health cess.
Maintaining capital expenditure momentum, options for revenue expenditure compression
Considering government spending, against an estimated full year revenue expenditure of INR39.4 lakh crore, only INR20.1 lakh crore has been spent during April-October FY26 (Table 1). This is 50.9% of the budget estimate. With respect to the capital expenditure outlook, out of a budgeted amount of INR11.2 lakh crore, GoI has spent INR6.2 lakh crore. In growth terms, while GoI’s capital expenditure grew by 32.4% during April-October FY26, revenue expenditure growth was contained to only 0.026%. A supplementary demand amounting to additional expenditure of INR41,455.4 crore may also have to be accommodated(2).
In order to adhere to the fiscal deficit target in the backdrop of some shortfall expected in GTR and net tax revenues, the GoI may spend less than the budgeted amount as far as revenue expenditures are concerned. With respect to capital expenditure, GoI may endeavor to meet the budget target.
Pursuit of fiscal consolidation
Chart 1 shows the steady but incremental adjustment in the fiscal deficit to GDP ratio after it had reached a sudden peak at 9.2% of GDP in the Covid affected year of FY21. Pursuing this path further, say by a margin of 0.4% points per year, implies a time path of 4%, 3.6% and 3.2% in the next three years, reaching close to the FRBM 2018 (amendment) target of 3% of GDP by FY29.
By incremental reduction in fiscal deficit of 40 basis points per year, the debt-GDP ratio would progressively fall to 50.0% or less by FY30 under the assumption that the nominal GDP shows an annual growth of 9.0% in FY26, 9.5% in FY27 and 10.0% thereafter. However, the achievement of the FRBM target of 40% of GDP appears to be at some distance.
Medium-term growth prospects for the Indian economy
According to the IMF, India is slated to maintain a real GDP growth path of 6.2% in FY27, 6.4% in FY28 and 6.5% FY29 onwards up to FY31. This appears feasible provided the fiscal policy emphasizes a sustained momentum of GoI’s capital expenditure growth in the range of 15%-20% on an annual basis while adhering to the fiscal consolidation path. This would facilitate maintaining a robust medium-term growth profile which would be further supported if domestic private investment growth also gathers momentum and global supply chain issues ease off.
Download the full pdf
Summary
For maintaining the fiscal deficit target, the Government of India may adjust revenue expenditure while maintaining capital expenditure growth momentum. This, in addition to adhering to the fiscal consolidation path, may remain key to realizing higher than 7% economic growth in FY26 and higher than 6.5% growth in the medium term.
How EY can help
-
Watch provides an in-depth review of salient developments in India’s macro economy and economic policy in a global context.
Read more -
Tax policy advisory services by EY India offers insights & strategies to navigate complex tax regulations, driving business growth and compliance.
Read more -
EY-Parthenon professionals can help your business design and provide transformative strategies for sustainable growth. Learn more.
Read more
Related articles
Center of gravity of world economy shifting towards the EMDEs
EMDEs will form 61% of global GDP in 2025, with India contributing 17.5% to global growth. Innovation is key to India’s rise beyond middle-income status.
India’s steady progress in poverty reduction
India’s poverty headcount ratio has fallen to 1% in 2025, showing dramatic progress in eliminating extreme poverty across rural and urban areas.
India’s trade with US and China: Performance and potential
Read the comprehensive analysis on performance and potential of India's trade relationships with the US and China, highlighting key trends and opportunities.