India’s economic growth could moderate to 5.5-6 per cent in the second half of 2026-27, according to a CLSA report. The expected slowdown is linked to a moderation in government capital spending after expenditure was concentrated in the first half of the financial year.
The report also cited weakness in the rural economy, an adverse base effect and continued uncertainty in the broader economic environment as factors that could weigh on growth during the second half of FY27.
Government Capital Spending Expected to Slow
According to CLSA, combined fiscal capital expenditure increased 13.2 per cent year-on-year during the first five months of FY27. However, the pace is expected to ease considerably over the remaining seven months.
Combined capital expenditure growth could moderate to around 4 per cent between September 2026 and March 2027, compared with 5 per cent recorded during the same period a year earlier.
CLSA said government spending had been “front-loaded in FY27” and warned that the combination of weaker rural activity, an unfavourable base effect and economic uncertainty could bring growth down to 5.5-6 per cent in the second half, compared with 7-7.5 per cent in the first half of FY27.
Defence Spending May Rise as Roads and Railways Remain Weak
The report expects the Centre’s capital expenditure growth to fall below 5 per cent year-on-year between September 2026 and March 2027.
While defence expenditure is expected to gain momentum, spending on railways and roads could remain broadly stagnant or decline, according to the report.
The projected moderation comes amid pressure on the government’s fiscal position during the opening months of FY27.
Fiscal Deficit Reaches 41.9% of Full-Year Target
The Centre’s fiscal deficit stood at 41.9 per cent of the full-year budget estimate during the first five months of FY27. CLSA said this was the highest level in six years, following a sharp decline in receipts in August.
Total government spending increased 10.5 per cent year-on-year during the first five months, compared with 13.8 per cent during the corresponding period a year earlier. Capital expenditure, excluding loans and advances, remained comparatively firm, rising 15.2 per cent year-on-year during the period.
At the state level, capital expenditure grew 10.4 per cent year-on-year in the first five months of FY27, down from 15.4 per cent a year earlier. As a result, combined capital expenditure growth by the Centre and states stood at 13.2 per cent, compared with 20 per cent in the first five months of FY26.
Rural Economy and Uncertainty Remain Key Factors
CLSA said India’s growth outlook will also depend on the performance of the rural economy and broader economic conditions.
The report noted that weaker receipts and continuing uncertainty could make it challenging for the Centre to maintain its planned spending pace. CLSA said the best-case scenario would be for the government to achieve its expenditure targets for the full financial year.
Disclaimer
This article is based on the CLSA report and information available at the time of publication. Economic growth estimates and fiscal projections are subject to change as new data, government spending patterns and broader economic conditions evolve. Readers should refer to official data and subsequent updates for the latest information.