Moody’s raises India GDP growth forecast to 7% from 6% over resilience to West Asia conflict

Moody's Ratings has raised India's real GDP growth forecast for 2026-27 to 7% from 6%, citing greater resilience to the West Asia conflict than previously expected. The upgrade reflects stronger private consumption, robust gross fixed capital formation, continued public infrastructure spending, signs of a revival in private investment, and sustained strength in the services sector.

India's real GDP growth accelerated to 8.2% year-on-year in the first half of calendar 2026, up from 7.3% for the full year in 2025, it said. Moody's attributed the upward revision to the economy's resilience to the global shock caused by the West Asia conflict.

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Domestic demand was the main driver of the more optimistic outlook. Moody's pointed to stronger private consumption, robust capital formation due to public infrastructure spending, a likely revival in private-sector investment, and ongoing strength in services. The agency expects India to grow faster than all other G-20 economies and similarly rated emerging market sovereigns.

The forecast marks a shift from earlier caution. The IMF lowered its FY27 forecast to 6.4% in July, citing global challenges, while raising FY28 growth to 6.7%. S&P cut its FY27 forecast to 6.6% in June, noting risks from energy prices, the Middle East conflict, a weaker monsoon, and slower global growth. The RBI also lowered its FY27 projection to 6.6%, citing similar concerns.

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Despite the improved outlook, Moody's warned of risks. Without a lasting resolution to the Middle East conflict, elevated energy prices could push inflation above its FY27 projection of 4.8%, which is already higher than the 2.4% recorded in FY26. El Nino-related disruptions could also increase food prices and affect consumption and economic activity.

India's diversified crude import sources, large foreign exchange reserves, and strong domestic demand provide buffers. However, higher energy and fertiliser import costs, weaker external demand, and reduced remittances from the Middle East could widen the current account deficit and slow growth.

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On the fiscal front, Moody's expects continued consolidation but gradual debt reduction over the next two to three years. The fiscal response to the Middle East shock has been muted, reflecting the government's commitment to lower the central government deficit to 4.3% of GDP in FY27 from 4.4% the previous year. Higher global energy prices may increase subsidy spending and pressure additional support measures, while rising defence and infrastructure spending could limit consolidation pace.

Moody's noted India's ratings balance its large and diversified economy with high growth potential, a sound external position, and a stable domestic financing base against high government debt, weak debt affordability, and low per capita income. While a predominantly domestic investor base supports financing flexibility, debt affordability is likely to remain weaker than similarly rated peers. Strong nominal GDP growth and efforts to improve tax administration and revenue collection should gradually improve fiscal metrics.