Moody’s raises India’s FY27 growth forecast to 7% from 6% but flags high debt burden, weak debt affordability

Moody’s Ratings has raised its forecast for India’s real GDP growth in fiscal 2026-27 to 7% from 6% previously, citing the economy’s resilience to global shocks, stronger private consumption, robust investment, and sustained services-sector growth. 

The ratings agency, however, retained India’s Baa3 long-term issuer rating and stable outlook, noting that the country’s high general government debt, weak debt affordability, and low per capita income continue to constrain its credit profile. 

Moody’s said it completed a periodic review of India’s ratings following a rating committee meeting on September 10, 2026. The review, it clarified, does not constitute a credit rating action or indicate whether a rating action is likely soon. 

Growth outlook upgraded amid economic resilience 

India’s real GDP growth accelerated to 8.2% year-on-year in the first six months of calendar 2026, compared with 7.3% for the full year in 2025, Moody’s said. The growth was supported by stronger private consumption, robust gross fixed capital formation—reflecting continued public infrastructure spending and a likely revival in private investment—and sustained strength in services. 

The agency said India’s demonstrated resilience to the global shock caused by the conflict in the Middle East prompted the upward revision to its FY27 growth forecast. “Although we continue to expect India to grow faster than all other G-20 economies, as well as similarly rated emerging market sovereigns, risks remain,” Moody’s said. 

The agency expects inflation to average 4.8% in FY27, significantly higher than the 2.4% recorded in FY26. A prolonged Middle East conflict could push energy prices higher, while El Niño-related disruptions could intensify food price pressures, weigh on consumption, and affect economic activity. 

India’s diversified crude import sources, sizeable foreign exchange reserves, and strong domestic demand provide buffers against external shocks, Moody’s said. However, higher energy and fertiliser import costs, weaker external demand, and a decline in remittance inflows from the Middle East could widen the current account deficit and weigh on growth. 

Fiscal consolidation to remain gradual 

Moody’s said the government’s fiscal response to the Middle East shock had been muted, reflecting its commitment to reducing the central government deficit to 4.3% of GDP in FY27 from 4.4% in the previous fiscal year. 

However, higher global energy prices could increase subsidy outlays and create pressure for additional support measures, despite adjustments to retail fuel prices since May. Rising defence expenditure and continued infrastructure investment could also constrain the pace of fiscal consolidation. 

The agency expects debt reduction to remain gradual, with debt affordability weaker than that of similarly rated peers because of India’s high debt burden and elevated interest costs. A predominantly domestic investor base, however, provides the government with financing flexibility and limits its exposure to exchange-rate risk. 

Moody’s expects fiscal metrics to improve gradually over the medium term, supported by strong nominal GDP growth and continued efforts to improve tax administration and revenue collection. 

The stable outlook reflects India’s improving fiscal metrics and resilient growth prospects relative to peers. However, fiscal accommodation, including revenue-eroding measures, could slow progress towards meaningful debt reduction and further weaken debt affordability, the agency said. 

Reforms and debt affordability remain key rating factors 

Moody’s said India’s economic strength benefits from the scale and diversification of its economy and its high growth potential, although these are offset by low GDP per capita. Its assessment of institutions and governance recognises progress in areas such as inflation targeting, digitalisation, GST, and financial-sector rehabilitation, while noting uncertainty over the effectiveness of reforms addressing challenges related to land and labour. 

The agency said upward pressure on the rating could emerge from a material improvement in the affordability of India’s debt, supported by fiscal measures that durably raise revenue, narrow the fiscal deficit, and contribute to a more marked decline in debt. 

Effective structural reforms that lead to a significant increase in private-sector investment, faster growth in GDP per capita, and broader economic diversification, particularly in higher-value manufacturing or digital services, could also strengthen India’s credit profile. 

Conversely, a sustained slowdown in growth, a reversal of fiscal consolidation resulting in materially higher debt, or a significant deterioration in debt affordability could exert downward pressure on the rating. A resurgence of financial-sector stress that is not addressed promptly and effectively would also weigh on the rating.