HSBC Warns of India's FY26 Growth Slowdown Due to Fiscal Tightening; US Trade Deal Crucial

According to a note by HSBC, India's economic growth might experience some weakness in the second half of Fiscal Year 2026. This is primarily due to a "tight fiscal stance" where the government is expected to reduce its spending. The report points out that the centre's fiscal deficit in the first half of FY26 was 1.6% of GDP, and to meet the full-year budget target of 4.4%, the deficit in the second half must be smaller than in the previous year, implying a contractionary fiscal impulse. This trend is also visible in capital expenditure, which might need to decrease in the second half of FY26 for the central government to adhere to budgeted growth targets. HSBC notes that revenue collection outlook is not very encouraging, with GST growth slowing. The report identifies a potential trade deal with the United States as essential for maintaining strong growth momentum. It explains that recent US tariff adjustments on China have put India at a tariff disadvantage. HSBC calculates that a reduction in US tariffs on India could significantly boost growth, helping to offset the impact of fiscal tightening.

Impact This news is significant for investors as it signals potential headwinds for Indian economic growth in the latter half of FY26 due to government fiscal consolidation. This could affect corporate earnings, particularly for sectors reliant on government spending or domestic demand. The emphasis on a US trade deal highlights external economic factors that could influence market sentiment and specific industries. The rating for the impact on the Indian stock market is 7/10.

Heading: Difficult Terms and Their Meanings Fiscal Deficit: The difference between the government's total expenditure and its total revenue (excluding borrowings). GDP (Gross Domestic Product): The total monetary value of all the finished goods and services produced within a country's borders in a specific time period. Fiscal Stance: The approach taken by the government regarding its spending and taxation policies to influence the economy. Fiscal Impulse: The effect of government spending and taxation on economic activity. A negative fiscal impulse implies that government fiscal policy is acting to slow down economic growth. Capital Expenditure (Capex): Spending by governments or companies on fixed assets that are expected to provide long-term benefits, such as infrastructure or property. Basis Points: A unit of measure used in finance to describe the smallest change in a security's price or yield; one basis point is equal to 1/100th of a percentage point (0.01%). GST (Goods and Services Tax): A consumption tax imposed on the supply of goods and services. Tariff: A tax imposed by a government on goods and services imported from other countries.