India enters FY26 with strong economic momentum, but emerging headwinds could test its resilience. Fiscal tightening, driven by the government’s commitment to consolidation, may temper spending, while weak global trade threatens export growth. As domestic demand remains robust, the key question is whether India can sustain its expansion despite tightening financial conditions and a challenging global environment.
Growth Moderation Ahead
India’s growth outlook for FY26 may moderate as tighter government spending and weaker global trade weigh on momentum, notes CLSA economist Leif Eskesen. The brokerage projects GDP growth at 6.9% -slightly below 7% reflecting strong underlying fundamentals but acknowledging emerging macro headwinds that could soften the pace of expansion in the coming quarters.
Eskesen expects India’s growth to cool slightly due to fiscal tightening. With the government aiming to meet its deficit targets, spending, especially on infrastructure, is likely to moderate. This reduction in public investment could temporarily ease momentum, even though overall economic fundamentals remain stable.
India’s growth faces pressure from weak external conditions, with the lingering effects of U.S. tariff hikes still weighing on exports. As global trade shows little sign of revival in the near term, this environment is expected to moderate India’s expansion compared with the strong momentum seen in the first quarter.
Moreover, the CLSA economist noted that any slowdown in India’s growth is likely to remain mild. He highlighted that recent GST reforms could gradually boost consumption, offering support to domestic demand. This uplift may help offset global headwinds, allowing the economy to maintain steady momentum despite external pressures.
Market Correction Concerns
Eskesen believes India’s overall growth outlook remains strong, even with some moderation ahead, and expects it to stay among the fastest-growing major economies in FY26. However, he cautioned that India cannot fully avoid the effects of a potential U.S. market correction. With U.S. equities looking “frothy,” any downturn there could reduce global risk appetite and affect capital flows into emerging markets.
Additionally, the economist warned that Indian equities may not escape a global downturn, especially with high valuations limiting foreign investor interest. He expects inflows to return after a “healthy correction.” If GST reforms lift growth and earnings stay strong, conditions could improve. On rates, he forecasts two small 25-bps RBI cuts, ruling out a larger move as core inflation remains near target.
Conclusion
India’s growth momentum may soften in FY26, but the underlying outlook remains resilient. While fiscal tightening and weak global trade could slow the pace, supportive domestic demand and the benefits of GST reforms may cushion the impact. With stable fundamentals and expected rate cuts, India is still positioned to outperform most major economies despite external risks.
Written by Abhishek Singh
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