Growth Outlook Weakens in Second Half of FY27
India's economic growth is likely to face headwinds in the second half of fiscal year 2027 as demand-related risks overshadow the cyclical tailwinds that previously supported the economy, according to a report by Nuvama. The report highlights that the positive impact of GST cuts is expected to diminish, while new challenges such as a potential El Nino event, slowing top-line growth due to base effects from higher commodity prices and rupee depreciation, and weak income and credit multipliers could dampen demand.
Key Factors Behind the Slowdown
The Nuvama report points to several factors that could pressure growth. The boost from GST rationalization is fading, and the possibility of an El Nino weather pattern poses a risk to agricultural output and rural demand. Additionally, commodity prices, which began rallying in September 2025, and the depreciation of the Indian rupee are now part of the base, meaning that unless there is a fresh surge in either, top-line growth will likely taper off.
"The impact of GST cuts will fade. El Nino poses risks to demand outlook... Commodity prices, which started to rally from September 2025, and the tailwinds of INR depreciation should now be a part of the base. Unless there is a fresh rally in either, top-line growth would taper off," the report stated.
Bank Credit Growth Not Translating into Broad Economic Activity
Nuvama noted that while bank credit has accelerated sharply over the past year, broader economic activity remains relatively weak. Aggregate credit growth has been slower, and a significant portion of the rise in industrial lending is attributed to higher working capital requirements rather than fresh capital expenditure. This suggests that businesses are not investing in expansion, which is a worrying sign for long-term growth.
Consumption has also failed to see a broad-based revival. Despite measures such as income tax relief, GST rationalization, welfare spending, and stronger household lending, consumption has improved only marginally over the past three quarters. This indicates that weak income growth continues to weigh on consumer spending.
Government Capex Slows, States Prioritize Revenue Spending
The report also observed a slowdown in government capital expenditure, with states increasingly prioritizing revenue spending over capital outlays. This shift could further dampen the growth momentum, as public investment typically has a multiplier effect on the economy.
Despite these challenges, Nuvama believes India remains relatively attractive compared with other emerging markets. Valuations have moderated, and recent measures by the Reserve Bank of India (RBI) to support the rupee could improve liquidity and foreign investor sentiment.
Market Outlook and Defensive Strategy Recommended
On the market front, the report noted that domestic institutional investors continue to provide support, even as foreign institutional investors have remained net sellers over the past two years. However, with demand risks expected to become more prominent, Nuvama recommends a defensive investment strategy. The report favors sectors such as IT, consumer, private banks, cement, and chemicals over cyclical sectors like industrials, metals, power, and automobiles.
In summary, while India's growth story remains intact in the near term, the second half of FY27 could see significant headwinds from fading fiscal stimulus, weather risks, and weak private investment. Policymakers may need to consider additional measures to sustain demand and support economic expansion.
