India Inc worried about domestic demand slowdown: BT-C Fore Business Confidence Survey

With an expected gross domestic product (GDP) growth rate of between 6% and 6.5%, India is likely to remain the fastest-growing big economy in FY26. It is already set to become the fourth-largest economy this year. This is surely a cause for celebration.

However, that is half the story. Economic growth this fiscal is seen to be much slower than in previous years, even amid expectations of a revival in private consumption, powered by the needs of 1.45 billion Indians, good rains, low inflation and interest rates, as well as personal income tax cuts.

No wonder then that the sentiment in India Inc about growth prospects—despite falling inflation, an accommodative monetary policy and good monsoon rains—is muted. This is reflected in the BT-C Fore Business Confidence Survey of 500 chief executive officers (CEOs) and chief financial officers (CFOs) conducted in the second quarter. It received largely cautious responses. The Business Confidence Index (BCI) recovered from the red to climb to 50.2 in the June quarter of FY26 (Q1FY26) from a 15-quarter low of 47.7 in the previous quarter.

But the sailing has been far from smooth. The confidence, as measured by the survey, has remained well below the average in recent years. The Q1FY26 reading was, in fact, the second lowest in 14 quarters. A number below 50 indicates a negative mood. Prior to this, it was the lowest in the December 2021 quarter, after which it was on an upward trajectory as India Inc slowly shrugged off the Covid-19 pandemic lows, except for the occasional dip.

Add to that the big challenge represented be US President Donald Trump’s tariff policies that have kept the world on the edge. India, which faces a 25% tariff on exports to the US and an additional 25% “penalty” for purchase of oil from Russia, is expected to see a slowdown in exports as well as gross domestic product (GDP) growth. Before Trump doubled the tariff on India, Minister of State for Finance Pankaj Chaudhary informed the Lok Sabha that around 55% of the total value of India’s merchandise exports to the US would be subject to the reciprocal tariff of 25%, effective August 7.

The International Monetary Fund (IMF), in its World Economic Outlook Update released in July, raised its global growth forecast for 2025 by 0.2 percentage points to 3%, but warned that “a rebound in effective tariff rates could lead to weaker growth.” An escalation of geopolitical tensions, particularly in West Asia or Ukraine, could introduce new supply shocks to the global economy, it cautioned.

Reserve Bank of India (RBI) Governor Sanjay Malhotra, in the recent bi-monthly monetary policy review, noted that economic growth is robust and in line with earlier projections, though below aspirations. “The uncertainties of tariffs are still evolving,” he said. The RBI kept its GDP growth forecast for FY26 unchanged at 6.5%. Chief Economic Advisor (CEA) V. Anantha Nageswaran, too, has said that it is too early to gauge the impact of the US tariff, but added that India has not shown any signs of slowing down.

The latest survey was conducted between July 10 and 25. By then, India Inc’s mood had lifted partially because two major conflicts that threatened to become prolonged came to an end, bringing much-needed peace and stability. This included the brief skirmish between India and Pakistan after a terrorist attack in Kashmir and the Israel-Iran-US military conflict. An early monsoon with forecast of above average rains also lifted the mood.

As per the survey, businesses across sizes and sectors were more confident overall than in the last quarter of FY25. While heavy engineering and services sectors showed a reading above 50, light industries remained in the red with a score of 49.7.

Similarly, big and medium industries were more confident about their prospects with business confidence scores of 51.8 and 50.6, respectively. In contrast, small and micro businesses remained anxious with readings of 49.9 and 48.5, respectively.

Growth Pangs

Firms are keeping their fingers crossed on economic prospects. The survey revealed that their confidence in the overall economic situation going forward was higher at 5.1 out of 10 for the September quarter, as against 4.9 in the last survey (for the June quarter). They were also more bullish on demand with a reading of 5.4 for the current quarter versus 4.8 in the previous quarter. The sentiment on profits in the second quarter was also up with a score of 5, but the outlook on hiring conditions was still muted at 4.7 versus 4.5 in the previous quarter.

“The economy is facing both headwinds and tailwinds,” says Devendra Kumar Pant, Chief Economist and Head Public Finance, India Ratings and Research, citing major tailwinds as monetary easing, faster-than-expected decline in inflation, and likely above-normal rainfall this year. Major headwinds are uncertain global scenario due to hike in tariffs by the US on all countries and a weaker-than-expected investment climate. In its mid-year economic outlook, the agency cut its India GDP forecast for FY26 by 30 basis points to 6.3% .

Ranen Banerjee, Partner and Economic Advisory Leader at professional services firm PwC India, says the first quarter of FY26 witnessed an uptick in both rural and urban demand, which was supported by income tax cuts and good rains. “This led to an improvement in business confidence,” he says, but cautions that companies remain on a wait-and-watch mode to confirm whether this demand will sustain. “This is because of concerns around external sector developments, primarily geopolitical tensions and trade-related uncertainties. All this is making firms nervous about a sustained recovery in consumer demand,” he says.

Ratings agency ICRA has also lowered its growth forecast for FY26 following Trump’s tariff announcements. Aditi Nayar, Chief Economist and Head of Research & Outreach at ICRA, explains that when the US had initially imposed tariffs, the agency had lowered its India GDP growth forecast to 6.2%, presuming a tepid rise in exports and a delay in revival of private sector capital expenditure.

The tariff and penalty now proposed by the US is higher than what was anticipated, and is therefore likely to act as a headwind to India’s GDP growth, she says. “We have lowered our growth forecast for growth from 6.2% to 6%,” she says.

The survey view

However, in the survey, only 19% firms believed that they would be impacted by higher US tariffs, while 52% said they would not be impacted. The survey was conducted before the US raised the tariff on India to 50%.

Banerjee of PwC India points out that India is primarily a domestic consumption-led economy. “Despite the US tariff hike, we expect the economy to grow between 6% and 6.5% this fiscal as domestic demand continues to remain strong,” he says.

While the US is still India’s largest trading partner, exports to the US accounted for just 2.2% of GDP ($86.5 billion) in FY25. As per a recent report by Morgan Stanley, the original 25% tariff and the additional penalty are both applicable on 67% of India’s exports to the US, which translates into $58 billion or 1.5% of GDP.

Thus, concerns run deep. Several other rating agencies have also cut their GDP growth forecasts marginally following the increase in US tariff. Barclays has estimated a 30 basis point impact on India’s GDP growth. Fitch has scaled down its GDP growth projection from 6.4% to 6.3% despite stating that the tariffs would have limited direct impact on Indian firms. Morgan Stanley has warned of as much as a 40 to 80 basis point dent on India’s GDP growth if the elevated tariffs persist for over 12 months, assuming that there are no mitigating factors.

Finance ministry officials are also worried that there would be a hit on growth and exports this fiscal due to the tariffs but say it may be too early to assess the exact impact. For the ministry, an equally contentious challenge is boosting private sector capex, which they believe can be a growth driver.

Slowing domestic growth is the top concern of respondents for the second quarter, the survey revealed. As many as 54% companies cited this as their chief worry in the September quarter, while 37% of firms polled rated external volatility, including wars and US tariffs, as the key concern.

To offset the impact of these headwinds, the commerce ministry is looking at various schemes to help exporters even as it works towards a deal with the US in the coming months, though US President Trump is playing hardball. Negotiations for trade deals with other countries, including New Zealand and the European Union, are also in full swing as the government strives to diversify India’s export markets. The government is taking feedback from administrative ministries and stakeholders on how to boost exports given the high US tariffs.

Businesses are looking forward to the benefits of the recently signed free trade agreement between India and the UK as well as the proposed trade pact with the US. As many as 67% of those surveyed believed that these two deals will impact their businesses in a positive way. Only 2% said they would have a negative impact.

Capex Conundrum

For the government, tepid private capital investment remains the big concern. The investment has not risen despite rate cuts of 100 basis points over the last six months, although the RBI chose to hold the rates in the recent policy. As many as 57% of those surveyed said that they were not planning any capital investments this fiscal.

For the Centre, this has meant close monitoring of capital expenditure by ministries to ensure they remain the engine of growth. In the first quarter of the fiscal, the Centre has spent Rs 2.75 lakh crore as capital expenditure, amounting to 24.5% of the Rs 11.21 lakh crore budgeted for FY26.

With the capex absorption capacity of traditional infrastructure ministries like roads and railways now appearing to reach the peak, the government is scouting for new areas such as urban infrastructure and ports for spending. States are also being prodded to boost capital spends. With robust revenue receipts of Rs 9.13 lakh crore between April and June, 26.7% of the full fiscal target, analysts believe the Centre can further step up capital spending.

But the question remains, when will India Inc push the pedal on capital expenditure? Experts say this could be some time away given that demand is not yet at its peak and US tariffs are causing more uncertainty.

Nayar of ICRA says businesses focussed on exports or in sectors where imports may become more competitive could further delay capex notwithstanding the rate cuts from the Monetary Policy Committee of the RBI.

Pant expects private sector capex to be limited to pockets for some time. Maintenance capex will continue, though, apart from heavy spending in sectors such as infrastructure and renewables. “But unless demand keeps increasing, chances of an across-the-board increase in private capex are slim,” he says.

As per the RBI, at the aggregate level, capacity utilisation in the manufacturing sector increased to 77.7% in the fourth quarter of FY25 from 75.4% in the previous quarter. Analysts believe this has to continue at 75-80% levels over an extended period before companies start investing.

In this scenario, companies are also cautious about hiring plans and the government’s push through the recently launched Employment Linked Incentive Scheme. Only 22% of respondents planned to hire more through this scheme, while 35% responded in the negative and 43% said it’s too early to comment on the impact of the scheme.

Banerjee of PwC India says hiring decisions are taken with a view of at least one-two years keeping in mind the planned capacity addition. “The ELI Scheme can work as a catalyst for companies that are indecisive on whether they wish to hire or not. Large-scale hiring just for accessing the ELI benefits is unlikely,” he says.

The recent large layoffs by IT giant TCS and low average salary hikes across industries are already keeping consumers on the edge.

Consumption Boost

On RBI rate cuts, firms had mixed reactions. Only 23% believed they would improve consumption demand. But India Inc is more hopeful about the reduction in income tax rates announced in Union Budget FY26 and monsoon rains with 46% believing these would have a positive effect on consumption. Full transmission of the rate cuts is yet to take place. The RBI governor has also flagged this. However, lenders may reduce rates over the coming months, pushing up demand.

Nayar of ICRA says the outlook for domestic consumption appears largely resilient. “Rural demand is expected to be upbeat in the near term, aided by robust crop output over the last two cropping seasons as well as an encouraging outlook for kharif sowing in the ongoing fiscal aided by the India Meteorological Department’s prediction of an above-normal monsoon,” she says.

On the urban front, the combination of sizeable income-tax relief, rate cuts leading to lower equated monthly instalments, and a moderation in food inflation are expected to boost disposable incomes, and consequently urban consumption, in FY26. “However, credit growth to consumption-oriented segments, like credit cards and other personal loans, moderated in the first two months of the fiscal, and needs to be monitored going forward,” she warns.

Easing retail inflation, which fell to a six-year low of 2.1% in June and is expected to stay close to 2% this fiscal, along with transmission of rate cuts by banks in the coming months, is expected to give more confidence to firms in the rest of the fiscal year.

The RBI’s Households’ Inflation Expectations Survey in July revealed that for both short term and one year ahead periods, inflation expectations have eased. The number of respondents anticipating a rise in both general prices and inflation has come down vis-à-vis the previous survey in May.

The other big development for India Inc seems to be plans to rationalise rates of the goods and services tax (GST). Prime Minister Narendra Modi promised next-generation GST reforms by this Diwali in his Independence Day speech, with the Centre proposing two rates of 5% and 18% along with a 40% rate on sin goods. The GST Council is expected to meet in September or October to decide on this. For 72% of respondents, multiple rates and high tax was the chief concern under GST, while for 18%, it was the high compliance burden.

The finance ministry’s monthly economic review for June was also optimistic and said that with inflation remaining within the target range and monsoon on track, the domestic economy is entering the second quarter of FY26 on a relatively firm footing.

The economy has also got a thumbs up from S&P Global Ratings that has upgraded India’s long-term unsolicited sovereign credit ratings on India to 'BBB' from ‘BBB-’ with a stable outlook. Projecting India’s GDP growth at 6.5% for FY26, it also said that it does not expect the 50% tariffs (if imposed) “to pose a material drag on growth”.

Official data on Q1 GDP growth estimates will be released at the end of August. The impact of the US tariff hike will also become clearer in the coming weeks even as uncertainity prevails over a trade deal.

FY26 promises to be a roller-coaster ride. It’s time to buckle up! 

@surabhi_prasad