Fitch Group’s BMI expects India’s growth momentum to cool as the impact of GST reforms fades and high inflation weighs on household purchasing power
India’s economic growth is expected to moderate to 6.6 per cent in FY27 from 7.7 per cent in FY26, as the impact of last year’s GST reforms fades and elevated inflation puts pressure on household incomes, Fitch Group company BMI said on Tuesday.
The forecast comes even as India remains the fastest-growing large economy in the Asia-Pacific region. However, BMI warned that risks to the growth outlook are tilted to the downside, particularly from a possible escalation in the West Asia conflict and a weaker-than-expected monsoon.
“We expect growth to moderate from 7.7 per cent in FY2025/26 to 6.6 per cent in FY2026/27, as the lift from last year’s Goods and Services Tax reforms wears off while elevated inflation erodes household incomes,” BMI said in its Asia-Pacific outlook.
The Indian economy grew 7.7 per cent in FY26, helped by strong domestic activity and the boost from GST rationalisation introduced last September. Under the reforms, GST rates on 375 items were reduced, while the four-tier structure was effectively streamlined into two major slabs of 5 per cent and 18 per cent.
BMI expects inflation to remain elevated at an average of 5.4 per cent in FY27. Higher prices could constrain real household incomes and, in turn, weigh on private consumption, an important driver of India’s growth.
More from BusinessExternal risks could further complicate the outlook. BMI said an escalation of the US-Iran conflict could push global oil prices higher, increasing India’s import bill and squeezing household purchasing power.
Its baseline forecast assumes that a preliminary US-Iran deal is implemented within the current quarter. However, any delay could push oil prices above BMI’s baseline assumption of $86 per barrel on average in 2026 and trigger further downward revisions to regional growth forecasts.
BMI said it is closely watching tanker traffic through the Strait of Hormuz. A deal that fails to restore normal shipping through the strategic waterway could result in significantly higher oil prices and weaker economic growth across the region.
For India, therefore, the growth outlook will depend not only on domestic demand and the fading GST boost, but also on inflation, crude oil prices, monsoon conditions and developments in West Asia.
The key reason is that policymakers are looking beyond the headline merchandise deficit. Strong services exports, steady remittance inflows and a sizeable foreign exchange reserve cushion continue to support India’s external accounts and reduce the risk posed by a wider goods gap.
The rise in the deficit has largely been driven by stronger imports, reflecting domestic demand and India’s continued dependence on overseas supplies across several critical categories. A higher import bill, however, is not necessarily viewed negatively if it is accompanied by productive economic activity and robust domestic growth.
For the government, the bigger picture remains relatively comfortable. India’s services sector generates a substantial surplus that helps offset the persistent merchandise trade gap. Remittances from Indians working overseas provide another important source of foreign exchange.
This means the government is not treating the latest widening in the trade deficit as a standalone warning signal. Instead, policymakers are likely to track whether the deterioration persists in the coming months and whether it begins to put pressure on the current account balance or the rupee.
Several factors will determine the trajectory. Crude oil prices remain particularly important because India imports most of its oil requirements. A sustained rise in global oil prices could significantly increase the import bill. Gold imports and the pace of merchandise exports will also remain key variables.
The government’s relative confidence therefore rests on the strength of India’s broader external buffers rather than the merchandise trade number alone.
The immediate question is whether the $30.4-billion deficit represents a temporary widening or the beginning of a sustained deterioration. For now, the government appears to believe that India’s services earnings, remittances and foreign exchange reserves provide enough cushion to manage the pressure.
