India's economy is on track for robust expansion in the coming years, with a forecast of 6.9 per cent growth for the financial year 2026-27 (FY27), according to a recent analysis by India Ratings & Research (Ind-Ra). The agency attributes this healthy pace to the cumulative impact of structural reforms, tax policies, and new international trade agreements, which are expected to cushion the economy against global headwinds.
Key Drivers: Reforms and Trade Pacts Fuel Growth
The report highlights several measures as primary growth engines. The implementation of the Goods and Services Tax (GST), reductions in income tax, and a series of recently concluded free trade agreements (FTAs) are cited as significant contributors. Ind-Ra expects the economy to continue in a “Goldilocks” phase, characterized by strong growth alongside manageable inflation. For FY27, retail inflation is projected to average around 3.8 per cent.
Chief economist Devendra Kumar Pant pointed out that a potential India-US trade deal, especially one that lowers tariffs, could provide an additional boost to the GDP growth figure. The agency also noted that FTAs with nations like New Zealand, the UK, and Oman are likely to bolster foreign investment inflows and help manage the current account deficit by attracting overseas capital.
Fiscal Health and Currency Outlook
On the government finances front, there is positive news. The Centre’s debt-to-GDP ratio is projected to improve to 55.5 per cent in FY27 from an estimated 56.3 per cent in the current fiscal year (FY25). The government's stated aim is to reduce this ratio to approximately 50 per cent over the next three to four years.
However, the currency might face some pressure. The Indian rupee is expected to weaken slightly, averaging 92.26 against the US dollar in FY27, compared to an estimated average of 88.64 in the ongoing financial year.
For context, Ind-Ra has estimated real GDP growth at 7.4 per cent for the current financial year (FY25), with nominal GDP growth seen at about 9 per cent.
Budget Expectations and Fiscal Projections
Looking ahead to the Union Budget for 2026-27, scheduled for February 1, Ind-Ra anticipates announcements related to customs duty rationalisation and allocations under initiatives like the Viksit Bharat framework. The report of the 16th Finance Commission, which will outline the tax devolution formula between the Centre and states for the five years starting April 1, 2026, is also expected on the same day.
Regarding fiscal numbers, the agency estimates the total budget size could increase to Rs 52 lakh crore in FY27, up from the budgeted Rs 50 lakh crore for FY26. However, revised estimates for FY26 might be lower, around Rs 49 lakh crore, due to a shortfall in tax collections. Tax revenues this year are reportedly likely to miss the target by about Rs 2 lakh crore.
This gap is expected to be covered through higher non-tax revenues and a marginal reduction in capital expenditure. Despite these revenue pressures, the fiscal deficit for FY25 is projected to remain at the budgeted level of 4.4 per cent of GDP, or Rs 15.69 lakh crore in absolute terms. Ind-Ra cautioned that the deficit figure might rise in absolute terms in the revised estimates, even if the percentage of GDP remains unchanged.
