By Alexander Jones, International Banker
India’s private sector regained momentum in September following a weak July and August. The HSBC Flash India Composite Purchasing Managers’ Index, compiled by S&P Global, rose to 56.5 in September from August’s final reading of 54.3, signalling the strongest expansion since June. Despite this recovery, however, the Asian Development Bank’s September forecast puts GDP growth at 7.0 percent in FY2026/27, below the revised 7.8 percent recorded in FY2025/26, with higher energy costs and a weaker monsoon weighing on the outlook. With other notable forecasts similarly pointing to a recent slowdown in the pace of economic expansion, questions are being raised about the durability of India’s long-term growth prospects.
Figures from India’s official Ministry of Statistics and Programme Implementation (MoSPI) confirm that growth in real gross domestic product (GDP) accelerated to 7.8 percent in FY2025/26 (April 2025 through March 2026) from 7.2 percent during the previous year, suggesting that economic expansion remains buoyant at present. But the International Monetary Fund’s (IMF) July 2026 “World Economic Outlook Update” predicted growth slowing to 6.4 percent in FY2026/27, before moderately recovering to 6.7 percent the following year.
Higher energy costs and disruption linked to the Persian Gulf conflict explain part of that expected decline, implying at the very least that a short-term deceleration is likely. A longer-term assessment, however, depends in part on whether the economy can expand at target levels after those temporary factors are resolved, and in particular, how investment, employment and productivity develop after the conflict subsides.
India must grow annually by at least 7.8 percent on average if it is to achieve its aspirations of reaching high-income status by 2047—the centenary year of its independence.
According to a February 2025 analysis from the World Bank, India must grow annually by at least 7.8 percent on average if it is to achieve its aspirations of reaching high-income status by 2047—the centenary year of its independence. But the bank also forecast growth to reach only 6.6 percent for FY27. While India is outgrowing virtually every major economy for the time being, it could nonetheless continue to lose ground against its own development timetable.
Fitch has joined the World Bank and the IMF in predicting a near-term slowdown for India’s economy. The credit-rating firm predicted GDP growth to ease from 7.7 percent in FY2025/26 to 6.6 percent in FY2026/27, with a weaker outlook for consumption being chiefly responsible for the predicted slowdown. It also forecasted a weakening in private-consumption growth, from 7.7 percent in FY2025/26 to 6.5 percent in FY2026/27.
Inflation and weather remain key risks to that outlook. India’s consumer price inflation rose to 4.82 percent year-on-year in August 2026, while food inflation reached 5.95 percent. In its September outlook, the Asian Development Bank projected average inflation of 5.0 percent for the fiscal year ending March 2027 and warned that higher input costs and an unfavourable monsoon could add to price pressures.
Sustaining rapid growth will also require more productive investment, particularly as India continues to recover from a prolonged decline in capital formation. Central government spending has helped drive an investment revival in recent years, however, with effective public capital expenditure rising from approximately 2.6 percent of GDP in FY2019/20 to 4.0 percent in FY2024/25.
More recent indicators suggest that investment demand is continuing to strengthen. Real gross fixed capital formation grew by 11.9 percent year-on-year in the first quarter of FY2026/27, compared with 5.8 percent a year earlier, while industrial production of capital goods rose by 16.9 percent year-on-year in August. Neither measure, however, establishes on its own how much of the new investment came from private firms rather than government projects or public enterprises.
Financing conditions have also become more accommodative during this time, with bank credit to industry growing by 17.5 percent in May and total financial flows to the commercial sector reaching ₹7.73 lakh crore (approximately US$80 billion) by June 30, compared with ₹3.12 lakh crore during the same period one year earlier. Although credit availability has historically been uneven, particularly against smaller companies, progress is being made to promote universal access to funds.
“While considerable progress has been made…I would not stand here and say that we have covered the credit gap. We have not,” RBI Governor Sanjay Malhotra acknowledged in a June speech on micro, small and medium-sized enterprises (MSMEs). “But I would certainly say that we have made considerable progress in meeting the financing needs of the MSME sector in the last few years. Moreover, we have covered the gap at a fast pace. Bank credit to MSMEs in the last five years grew at a CAGR of 15 percent, while overall bank credit grew at a CAGR of 13.7 percent during the same period.”
That said, with year-on-year credit growth across scheduled commercial banks reaching 18.6 percent by the end of June, comfortably outpacing the 13.3-percent deposit growth across the same period, banks may eventually need to attract more deposits to fund their lending by offering higher interest rates to depositors or rely more heavily on wholesale funding, both of which raise their own costs.
The World Bank expects around 11 million young people to enter the labour market every year over the next two decades.
The quality of investment also matters, especially given that India must continue to find productive work for a rapidly expanding labour force. The World Bank expects around 11 million young people to enter the labour market every year over the next two decades. Their arrival can expand the economy’s productive capacity, but firms must be committed to creating jobs capable of raising output, wages and household consumption.
India’s employment structure, however, makes that task decidedly challenging. Agriculture still accounts for more than 45 percent of total employment, while informal enterprises employ 73.2 percent of workers, compared with an average of 32.7 percent across a group of emerging-market peers. And while labour-force participation is rising, particularly among women, a worker moving into low-paid agricultural work or unpaid employment in a household enterprise does not generate the same productivity and income gains as a formal job in manufacturing or modern services.
India’s monthly Periodic Labour Force Survey, for example, put the share of people aged 15 and above who were working at 52.8 percent in August 2026, while women’s labour force participation reached 34.8 percent. While these improvements are encouraging, participation and employment rates alone do not indicate whether new work is formal, well paid or productive enough to support sustained income growth.
This employment challenge will become even more pressing as India’s demographic advantage fades. The World Bank forecasted the dependency ratio—that is, the number of younger and older people relative to the working-age population—to rise from 45 percent in 2032 to 49 percent by 2050. “India can take advantage of its demographic dividend by investing in human capital, creating enabling conditions for more and better jobs,” World Bank economists Emilia Skrok and Rangeet Ghosh stated in February 2025.
Greater trade integration and foreign investment could help distribute technology and productive employment more widely. The IMF has estimated that India’s inward stock of foreign direct investment (FDI) equals 15 percent of GDP, compared with 24.6 percent across middle-income developing economies. Only 5.4 percent of surveyed Indian firms use technology licensed from foreign companies. Gross inward FDI reached $43.9 billion during April–July 2026, up from $38.9 billion over the same period a year earlier, but this improvement does not fully offset India’s longer-term shortfall relative to its peers.
India’s government believes recent reforms have raised the economy’s sustainable growth rate. “On medium-term trend growth for the Indian economy, we believe now it is 7 percent,” Chief Economic Adviser V. Anantha Nageswaran said following the publication of the “Economic Survey” in January, adding that this rate could reach 7.5 to 8 percent if India improves manufacturing and export competitiveness, addresses land-related difficulties and reduces production costs.
Although India may well be experiencing a near-term private-sector growth slowdown, therefore, the evidence for a more established, secular decline remains weak. But while the current growth performance remains indisputably exceptional by international standards, the country may still undershoot its own lofty goals unless the public-investment drive and repaired banking system produce a sustained increase in private investment, productive employment and technology adoption.