Bank of Baroda economists predict India's GDP will grow 6.5-6.8 per cent in FY27 but caution that the fiscal deficit could significantly overshoot its 4.3 per cent target, driven by subsidy pressures and excise duty cuts amidst global headwinds.
Key Points
- India's GDP is projected to grow between 6.5-6.8 per cent in FY27, despite headwinds from the West Asia crisis.
- The fiscal deficit is expected to overshoot the budgeted 4.3 per cent target, potentially reaching 4.7-4.8 per cent of GDP, with a shortfall of approximately Rs 2.1 trillion.
- Key pressure points on the fiscal side include fertiliser subsidy overruns, the Rs 10 per litre cut in special additional excise duty on petrol and diesel, and ongoing losses by oil marketing companies.
- BoB economists forecast full-year CPI inflation at 4.8-5.2 per cent and WPI at 8.9 per cent for FY27, with oil price volatility significantly impacting the CPI basket.
- The Reserve Bank of India is expected to maintain a status quo on rates, adopting a data-driven, wait-and-watch approach given the evolving economic landscape.
India’s GDP is projected to grow in the range of 6.5-6.8 per cent in the financial year 2026-27 (FY27) while facing headwinds from the West Asia crisis, Bank of Baroda (BoB) economists said on Friday, warning that the fiscal deficit could overshoot the budgeted 4.3 per cent target to 4.7-4.8 per cent of GDP.
The fiscal strain could include a shortfall of about Rs 2.1 trillion, with the absolute deficit rising from the projected Rs 17 trillion to Rs 18-18.5 trillion, it said.
Fiscal Pressure Points Identified
The public sector bank (PSB) identified three main pressure points on the fiscal side: First, the fertiliser subsidy, which is budgeted at Rs 1.7 trillion for FY27 is expected to overshoot by Rs 34,000 crore to 50,000 crore, as rising gas prices push up urea production costs.
Second, the Rs 10 per litre cut in special additional excise duty on petrol and diesel is expected to cost the exchequer around Rs 1.3 trillion.
Third, oil marketing companies (OMCs) are still losing about Rs 750 crore a day, or Rs 65,000 crore to 70,000 crore per quarter.
This could weaken dividend income and corporate tax collections. Total shortfalls from these pressures amount to approximately Rs 2.1 trillion, the bank noted.
“If you do want to maintain the deficit level around 4.3 per cent your capital expenditure will have to be reduced. Your expenditure in other ministries on the revenue side will also have to be brought down,” added Sonal Badhan, economist, BoB.
The bank expects the rupee to range between 97 and 98 per dollar in the coming months, driven largely by foreign institutional investor (FII) outflows from equity markets into safe-haven assets, and a greenback that has strengthened 1.5 per cent since February.
On inflation, BoB economists said around 13.6 per cent of the consumer price index (CPI) basket will be affected by oil price volatility, with the annualised impact on CPI projected at 1.2 to 2 per cent.
The full-year CPI inflation forecast is 4.8 to 5.2 per cent.
The wholesale impact is expected to be sharper, at 2.3 to 3.7 per cent overall.
The widening gap between wholesale price index (WPI) and CPI of inflation shows companies are absorbing input cost increases rather than passing them on to consumers, thus squeezing their margins, the economists noted.
WPI for full year FY27 is hence seen at 8.9 per cent.
Monetary Policy and Economic Performance
On the growth side, BoB economists flagged export — where petroleum products alone account for 12 per cent of total exports — investment decisions being disrupted by supply chain pressures, and potential weather-related food supply shocks from building El Niño conditions as the key risks to the GDP outlook.
On monetary policy, the bank said it expected the Reserve Bank of India to maintain a status quo on rates and remain in wait-and-watch mode, given that only the April CPI print is available so far and the full impact of the crisis is yet to be assessed.
“RBI will be more watchful and take a data-driven approach,” added Dipanwita Mazumdar, economist, BoB.
“We are looking at a fairly stable performance of the Indian economy, notwithstanding the war effects, but definitely at a micro level, that is at the industry level, there will be a lot of concerns,” said Madan Sabnavis, chief economist, BoB.
