Whalesbook
India's economy is showing strong resilience and is set to outperform global peers, driven by solid domestic fundamentals and careful fiscal management. S&P Global Ratings has kept a stable outlook on the country's credit rating, noting India's "political commitment to fiscal consolidation." However, specific vulnerabilities could still challenge this strength.
India's Growth Forecast: Outpacing Global Peers
S&P Global Ratings predicts India's GDP will grow 7.1% in fiscal year 2026-27 if oil averages $85 per barrel. Even if oil hits $130 per barrel, growth is forecast to remain robust at 6.3%. This rate is much higher than global growth, which the IMF expects to be 3.0-3.1% in 2026. Major economies like the US are projected around 2.0-2.3%, and China around 4.2-4.8%. Goldman Sachs forecasts India's GDP growth at 6.9% for 2026. India's strong domestic demand and supportive policies are key drivers, offering greater stability than in past decades when oil price shocks severely damaged its economy.
Historical Resilience and S&P's Rating
Previous oil price spikes—like those in the 1970s and 2008—previously sent India's economy into turmoil, causing high inflation, currency drops, and widening current account deficits. For example, the 2008 shock caused the rupee to fall 25% and the current account deficit to reach 11% of GDP. Today, structural changes, such as the growth of the services sector and better energy efficiency, make India more resilient.
This improved resilience, coupled with strong growth and steady fiscal tightening, led S&P Global Ratings to upgrade India's sovereign rating to 'BBB' in August 2025. The agency's confidence in India's fiscal management is evident as it believes the current oil price shock will not impact the rating. S&P noted the government's commitment to long-term fiscal discipline and its ability to shift spending, possibly cutting subsidies to meet deficit goals.
Key Risks for India's Economy
Even with S&P's positive view on the credit rating, significant risks could test India's economic performance. If oil prices stay high, averaging $130 per barrel for a long period, India's growth could slow by as much as 0.8%. Corporate earnings are at risk, with EBITDA potentially dropping 15-25% and leverage rising by 0.5x-1x in fiscal year 2027. The banking sector's asset quality might also weaken, potentially pushing non-performing assets toward 3.5%. The current account deficit could widen by about 0.4% of GDP for every $10 per barrel oil price increase, made worse by possible lower remittances from the Middle East. Supply disruptions could lead to fuel rationing and shortages of essential goods like fertilizers. While the government is committed to fiscal consolidation, these efforts might face temporary challenges. The debt-to-GDP ratio is forecast at 55.6% for 2026-27, still a large amount of debt. Notably, interest payments alone are projected to surpass GDP growth in FY27, showing ongoing pressure from debt servicing.
Looking Ahead
India's economic momentum is expected to continue, making it a key driver of global growth. However, maintaining this strong performance means navigating volatile energy prices and geopolitical uncertainties. Fiscal discipline, ongoing infrastructure investment, and structural reforms to manage debt will be crucial for long-term stability and realizing India's growth potential.