Growth in India may see some weakness in the second half of FY26 due to a tight fiscal stance in the period, according to a note by HSBC. In the first half of the fiscal year, the centre’s fiscal deficit was 1.6% of FY26’s GDP, compared to 1.4% in the year-ago period. In the budget, the fiscal deficit was pegged at 4.4% of the GDP in FY26, implying that the government is likely to run a smaller deficit of 2.8% in the second half, compared to 3.3% in the same period last year.

“This implies a negative fiscal impulse of 0.5 percentage points in the second half of FY26. Even if we were to assume that there will be a fiscal slippage of about 20 basis points (due to weak revenues), that still leaves us with a negative fiscal impulse of 0.3 percentage points,” reads the note.

This trend is also palpable in the capital expenditure trends of both the centre and state governments. The centre’s capital expenditure has grown by 40% year-on-year, and if it were to settle close to the budgeted growth of 10%, the centre’s capital expenditure will have to contract in the second half of FY26, according to HSBC.

“The outlook for revenue collections isn’t too exciting either. There was a rise in direct tax collection in September, and yet, the required growth rate for the second half of FY26 (to meet the budget targets) looks ambitious. GST collection growth has also started to slow due to the rate cuts. Thus, the government’s spending momentum could slow in the second half of FY26, to end the year closer to the budgeted fiscal deficit targets,” the note adds.

To maintain strong growth momentum, HSBC says a potential trade deal with the U.S. is essential in the next few months. It may be noted that after a successful summit between President Xi and President Trump in Korea last week, the U.S. agreed to lower fentanyl-related tariffs on China from 20% to 10%. This has lowered the rest of Asia’s “tariff advantage” over mainland China, and in particular, India now has a “tariff disadvantage”.

“We calculate that if the US tariff on India is lowered from 50% to 20%, that can lower the growth drag by about 0.5 percentage points over a year (helping offset the fiscal fallout of the second half of FY26).”