Fitch Ratings raised India’s FY26 GDP growth forecast from 6.9% to 7.4% (announced Dec 4, 2025). This upgrade followed an unexpectedly strong Q2 (July–Sept) print: GDP grew 8.2% year-on-year – the fastest pace in six quarters. Fitch attributed the upward revision to booming domestic demand and recent policy moves (notably GST tax cuts) that have spurred spending. The agency still expects growth to moderate later – projecting about 6.4% in FY27 – as one-off boosts fade. Also, Reserve Bank of India has maintained an accommodative stance with 100 basis points of rate cuts delivered throughout 2025​. CRR reduction from 4% to 3%, improving banking system liquidity​. Expected final cut to 5.25% in December 2025, which Fitch believes will mark the end of the easing cycle.

Drivers of the Upgrade

Strong consumer demand

Fitch emphasizes that “private consumer spending is the main driver” of this year’s growth. As households enjoy rising real incomes and confidence improves, purchases of everything from groceries to big-ticket goods have surged.

GST and tax reforms

The GST rate cuts effective September 22, 2025, represent a crucial policy lever that amplified consumer demand. The reforms' scope and impact include - 375 items saw tax rate reductions, moving nearly 99% of consumption items into lower tax brackets (0%, 5%, or 18%).​ Only 1% of items now attract the highest 40% tax rate, dramatically reducing the tax burden on most consumer goods.​ The price reductions across multiple product categories directly stimulated consumption by improving affordability and boosting business sentiment.

Robust Q2 performance

The July–Sept quarter GDP jump to 8.2% (up from 7.8% in Q1) shows momentum was already picking up. Services and manufacturing both grew strongly, and private investment held up. This broad-based strength convinced Fitch to raise the full-year forecast.

Low inflation / higher real incomes

India's inflation trajectory has created exceptional macroeconomic conditions - CPI inflation at 0.3% in October represented an all-time low, driven by lower food and beverage prices.​ The GDP deflator rose just 0.5% year-on-year in Q2, indicating minimal price distortion in growth figures.​ This narrowing gap between nominal and real GDP signals that growth is genuine and sustainable rather than inflated by price effects. Such low inflation boosts real incomes and spending power. Fitch notes that with inflation so muted, the Reserve Bank of India (RBI) has room to cut rates further, which can sustain consumption.

Purchasing Power and Standard of Living

The combination of 7.4% growth with 1.5% average inflation in FY26 creates exceptional real income growth prospects. Lower taxes across 99% of consumption items directly improve living standards, particularly for middle and lower-income households.

Global Economic Pressures

Trade Barrier Challenges: India faces one of the highest effective tariff rates (approximately 35%) on its exports to the US. Fitch noted that a trade agreement reducing this burden would significantly boost external demand, but absent such a deal, export competitiveness remains constrained.

Sectoral Impacts and Opportunities

Retail & FMCG

Sales of consumer goods and fast-moving items are surging as households spend more. Fitch highlights continued “buoyancy in consumer-facing industries, from retail and FMCG to automobiles”. Companies in grocery, apparel, and everyday essentials are seeing higher volumes.

Automobiles

Rising income and low borrowing costs are driving vehicle purchases. Passenger car and two-wheeler makers report healthy order books, and auto sales are up year-on-year. This revives demand for related industries (tyres, batteries, electronics). Fitch specifically mentions auto demand as a growth area.

Housing / Construction (Cement)

A boom in home-building and infrastructure is lifting construction activity. Leading cement companies saw up to 18% revenue growth in Q2, reflecting strong rural and urban housing demand. Supportive factors include low home loan rates, good monsoon aiding rural housing, and GST/tax incentives for construction.

Financial & Real Estate Services

Financial services (banks, NBFCs, insurance) benefit from higher credit growth and falling loan rates. With higher household spending, banks are lending more for housing and vehicles. According to official data, financial and realty services grew about 10.2% in Q2, indicating robust activity in real estate and financial markets.

Manufacturing & Industry

India’s factories have turned a corner: manufacturing output jumped 9.1% in Q2. This broad-based pick-up covers capital goods, consumer durables, textiles and more. Higher domestic demand (and stronger exports) is helping plants run at fuller capacity. Overall industrial growth is solid, supporting jobs and investment in machinery.

Outlook : Inflation, Policy and Risks

Moderating growth ahead

Even as FY26 turns out stronger, Fitch expects growth to ease to about 6.4% in FY27, closer to the economy’s long-term potential. The exceptional consumption tailwind may fade. Fitch notes that sustaining 7%+ growth will require a significant pickup in private investment and continued reform momentum.

Inflation & monetary policy

Inflation is forecast at only ~1.5% for FY26 (well below the RBI’s 4% target mid-point). With prices so tame, Fitch projects one more RBI repo rate cut (to 5.25%) in Dec 2025. After that, the RBI is likely to hold policy steady through 2026 to prevent overheating. Low inflation also means real interest rates stay attractive, aiding consumer spending and investment.

External risks

Global factors could still slow India. Fitch warns that a sharper-than-expected worldwide slowdown, rising crude prices, or renewed trade tensions would dampen growth. For instance, India faces among the highest effective tariffs (≈35%) on exports to the US – any changes in trade policy could affect exporters. A strong dollar or foreign outflows could pressure the rupee, though Fitch expects only a mild depreciation (around ₹87/USD by end-2026).

Dependence on consumption

Finally, Fitch cautions that growth is currently very consumption-driven. If private investment does not rebound, India’s economy may rely too heavily on household spending. Any reversal of consumer confidence or inflation picking up could slow momentum. Fitch explicitly notes that “maintaining this pace will require a sustained pickup in private investment” and that risks like rising inflation or fiscal stress could curb growth.

Bottom Line

Fitch’s upgrade to 7.4% underscores India’s strong near-term growth, fueled by spending power and recent GST/tax reforms. The brighter outlook suggests continued strength for consumption-driven sectors (retail, FMCG, autos, housing, finance). For consumers and businesses, this means more jobs and incomes, and a generally positive economic environment. However, as Fitch notes, keeping growth on track will hinge on low inflation, stable global conditions, and boosting private investment. In sum, India is now projected to be one of the fastest-growing major economies, but sustaining that advantage will depend on prudent policy and steady demand.