A clutch of economic agencies, investment banks and official institutions have turned more cautious on India’s near-term outlook, even as high-frequency indicators suggest the economy entered 2026 on a relatively firm footing.
The shift is notable not because growth is collapsing, but because multiple risks, energy prices, capital flows, currency pressures and geopolitical uncertainty are converging at once. Reports from Icra, Goldman Sachs, Crisil, SBI Research and the Finance Ministry collectively point to a common concern: external shocks may begin to outweigh domestic resilience in the months ahead.
India’s economic activity strengthened in February, with Icra’s Business Activity Monitor showing a 10.0 per cent year-on-year expansion, up from 8.9 per cent in January, supported partly by a favourable base.
The improvement was broad-based, with 11 of 16 indicators, including auto production, vehicle registrations, trade and financial metrics, showing stronger growth, according to Icra.
However, the ratings agency flagged that the headline strength masked underlying weaknesses. Core sector growth slowed sharply to 2.3 per cent in February from 4.7 per cent in January, reflecting a broad-based deceleration across seven of eight industries. This moderation is expected to pull down industrial output growth to around 4.0 per cent.
Icra noted that the slowdown in core output had set in even before geopolitical tensions escalated, indicating “emerging fragilities in industrial momentum”.
Early data for March suggests further softening. Electricity demand growth slowed to 0.8 per cent year-on-year from 4.9 per cent in February, while vehicle registration growth eased to around 14 per cent from 25.6 per cent.
West Asia Conflict Raises Energy Risks
A central concern across reports is the impact of the ongoing West Asia conflict on global energy markets.
Icra attributed the expected slowdown in activity to rising energy prices, supply disruptions and heightened financial volatility linked to the conflict. It warned that even if tensions ease quickly, energy prices are unlikely to revert to February levels soon. Assuming crude oil at USD 85 per barrel, Icra has lowered its FY2027 growth expectation to 6.5 per cent from an estimated 7.5 per cent for FY2026.
Goldman Sachs has taken a more bearish view, cutting India’s 2026 growth forecast to 5.9 per cent, a cumulative downgrade of 110 basis points from its earlier projection of 7 per cent before the escalation of tensions.
The investment bank highlighted that beyond crude oil, liquefied natural gas (LNG) poses a significant risk. Supply disruptions, including potential force majeure events at major exporters such as QatarEnergy, could constrain availability.
Unlike oil, LNG markets are more vulnerable due to limited storage capacity, making economies like India, which rely heavily on imports, more exposed to supply shocks.
The Finance Ministry has also flagged risks stemming from India’s dependence on imported energy and global trade routes.
In its Monthly Economic Review, the ministry pointed to the strategic importance of the Strait of Hormuz, through which a significant share of global crude shipments passes. Any disruption could tighten supply and push prices higher, increasing India’s import bill.
The report warned that sustained high crude prices could feed into broader inflation through higher transportation and logistics costs, complicating price stability efforts.
It also highlighted potential spillovers into financial markets, noting that heightened global uncertainty could affect investor sentiment, capital flows and currency movements.
Capital Outflows And Currency Pressures Intensify Risks
Beyond energy, financial conditions have tightened significantly, amplifying concerns about growth.
SBI Research noted that foreign institutional investors have withdrawn around USD 14.3 billion in FY2026, with March alone seeing outflows of roughly USD 11.8 billion, potentially one of the worst months on record. Net foreign direct investment has also turned negative for five consecutive months.
These outflows have put pressure on the rupee, which has weakened past 93 per USD and is approaching 94. SBI Research warned that the currency may slide further towards 96 if the conflict persists.
The report added that the rupee is no longer acting as an effective shock absorber, as export responsiveness to currency depreciation has weakened.
Liquidity conditions are also tightening. Core liquidity could fall below Rs 1 lakh crore in early FY2027, while the 10-year government bond yield has risen to 6.84 per cent, increasing borrowing costs.
Higher energy prices are expected to widen India’s current account deficit, a concern echoed across agencies.
Goldman Sachs projects the deficit could reach 2 per cent of GDP or more in 2026 due to elevated import bills. SBI Research estimates a deficit of 1.3–1.5 per cent of GDP, or around USD 60 billion, assuming oil prices near USD 100 per barrel.
SBI Research also highlighted the sensitivity of India’s import bill to oil prices, estimating that every USD 1 per barrel increase adds USD 1.5–2.0 billion to the bill.
Inflation risks are also building. Goldman Sachs has raised its inflation forecast by 40 basis points to 4.6 per cent, citing potential currency depreciation and pass-through of higher import costs.
While this remains within the central bank’s target range, agencies warn that persistent energy shocks could complicate monetary policy decisions.
Domestic Demand Remains A Key Buffer
Despite the growing external risks, domestic demand continues to provide support.
Crisil expects India’s GDP to grow 7.1 per cent in FY2027, down from 7.6 per cent in FY2026, but still relatively robust compared with global peers.
The firm highlighted that household consumption — accounting for around 57 per cent of GDP — will remain the primary growth driver. Fiscal measures such as income tax cuts, GST rationalisation and direct benefit transfers have supported disposable incomes and borrowing capacity.
Discretionary consumption sectors, including automobiles, airlines, hotels and consumer durables, are expected to outperform, driven by improving affordability and pent-up demand.
Construction activity also remains strong. Icra noted that cement output and finished steel consumption grew 7–10 per cent, indicating sustained momentum in infrastructure and real estate.
Another area of resilience is investment.
Crisil expects industrial capital expenditure to strengthen, with annual capex projected at around Rs 9.1 lakh crore between FY2027 and FY2031, about 1.5 times the previous period.
Investment is expected to expand beyond public infrastructure into manufacturing and emerging sectors such as electronics, semiconductors, electric vehicles, solar manufacturing and artificial intelligence infrastructure.
Corporate revenue growth is projected at 8–9 per cent, though profitability may face pressure from rising input costs and supply disruptions.
Labour market indicators show modest improvement. Icra reported that the all-India unemployment rate eased to 4.9 per cent in February from 5.0 per cent in January, driven by a decline in urban female unemployment.
At the same time, financial flows to the commercial sector remain strong, rising 33.2 per cent year-on-year to Rs 39.2 trillion in the first 11 months of FY2026, largely due to non-food bank credit growth.
However, Icra noted that credit growth has begun to moderate, suggesting a potential cooling in momentum.
Chief Economic Advisor V Anantha Nageswaran struck a measured tone on India’s medium-term trajectory, stating that the country is likely to remain the world’s fifth-largest economy in FY2027.
He noted that overtaking Japan would be difficult due to the size gap, with Japan’s GDP projected at around USD 4.4 trillion by the end of 2025, leaving India trailing by about USD 500 billion.
India’s nominal GDP has also been revised lower following a base year update, with FY2026 estimated at Rs 345.4 lakh crore, translating to roughly USD 3.9 trillion.
Nageswaran said sustained real growth of around 7 per cent and nominal growth of 10–11 per cent would be needed for India to climb global rankings over time.
Why Agencies Are Turning Cautious Now
The convergence of multiple risks explains the synchronised caution across agencies.
First, the timing: the West Asia conflict has introduced a fresh and potentially prolonged external shock just as India’s industrial momentum shows signs of weakening.
Second, the nature of the shock: energy markets affect not just inflation, but also trade balances, fiscal dynamics and corporate profitability, creating economy-wide ripple effects.
Third, financial tightening: capital outflows, rising bond yields and currency depreciation are reinforcing the impact of higher energy prices.
Finally, uncertainty: agencies highlight that the duration and intensity of the conflict remain unclear, making downside risks difficult to quantify but significant.
While India’s domestic fundamentals, consumption, infrastructure spending and a strengthening investment cycle remain intact, agencies increasingly agree that the balance of risks has shifted.
Icra summed up the near-term outlook succinctly, noting that “the strength seen in February may prove temporary as global uncertainties begin to feed into domestic activity”.
For policymakers, the challenge will be to navigate a complex environment where growth, inflation and financial stability risks are rising simultaneously and where global developments may ultimately determine how resilient the domestic economy can remain. |
