India economic growth seen losing momentum after strong start to fiscal year

Economic growth in India is forecast to have slowed this fiscal year from a surprisingly strong pace and hover around 7% over the forecast horizon as higher energy costs add to near-term inflation risks, a Reuters poll of economists found.

The US-Israeli-led war with Iran has so far had limited impact on economic growth, but it has pushed up inflation mainly through higher energy costs. The Reserve Bank of India has raised rates once and is expected to do so twice more, to 6.0%, by end-March.

But with no planned major policy changes, Asia’s third-largest economy is forecast to carry on growing steadily at a rate most forecasters agree will not bring about any significant improvements in job prospects, particularly for young people.

“7% growth is quite healthy, especially in this climate. But is that healthy for India? I would say it’s probably just average,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.

Gross domestic product was forecast to grow 7.1% in the fiscal year ending March 2027, according to the median estimate in an October 19-26 Reuters poll, down from 7.7% in FY 2025-26. Growth was then expected to ease to 7.0% in FY 2027-28.

The forecast for this fiscal year was in line with RBI expectations as well as an earlier Reuters survey and broadly matched that of the International Monetary Fund.

Economists have underestimated India’s growth in 10 of the past 12 quarters despite forecasts generally clustering within a narrow range close to 7%.

JOBS OUTLOOK DIMS AS OIL, AI WEIGH

Private investment, a key driver of job creation, expanded by nearly 12% in the June quarter. Forecasters say sustaining such growth will become increasingly difficult if oil prices remain elevated. Crude oil futures are trading around $116 a barrel, about 60% above pre-war levels.

India has also missed out on the surge in AI investment that has lifted growth in other Asian economies like South Korea.

“India’s caught between its own … domestic issues of low, insufficient private investment growth, but also there’s this global backdrop of AI making it unnecessary to hire as many entry-level positions,” said Chanco. “It’s causing a lot of dissatisfaction among the youth in India, and rightly so.”

A student-led movement that began as online satire has spilled onto India’s streets in recent months, reflecting growing concerns over education and jobs despite the country’s rapid economic growth.

Inflation is squeezing household budgets as savings dwindle. Price growth was forecast to average 6.1% this quarter and remain above the RBI’s 4% medium-term target at least until end-2027.

That outlook is slightly higher than the forecast in last month’s survey.

“Stronger cost pass-through (from higher energy prices) and gradually rising services inflation increase the risk that elevated price pressures become embedded,” wrote Kunal Kundu, India economist at Societe Generale.

Households are at risk from future cuts to welfare spending, which has long helped support demand and protect millions from poverty, economists say. The 2026-27 budget projected a 4.5% cut in food, fertiliser and petroleum subsidies.

“The fact not only the central government but state governments are also actually providing significant amounts of cash to protect consumption, which is basically all the schemes they are running, immediately tells me all is not well,” said Indranil Pan, chief economist at Yes Bank.