India’s growth momentum remains strong, but consumption and fiscal risks loom: SBICAPS
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India’s economic momentum remained robust in the second quarter of FY27, supported by strong manufacturing activity, automobile sales, industrial production, and credit growth, according to a report by SBICAPS. However, the report flagged emerging risks to consumption, fiscal consolidation and external flows, which could weigh on economic activity in the second half of the financial year.
Manufacturing activity gained momentum towards the end of Q2FY27, with the Purchasing Managers’ Index (PMI) rebounding after a brief slowdown. Automobile retail sales recorded their highest-ever September performance while industrial production remained strong over the past three months. Double-digit growth in industry credit further points to strong manufacturing gross value added (GVA) growth.
Trade activity also remained buoyant, with rising port cargo volumes, strong goods exports and railway freight growth. GST revenue linked to imports increased 26% year-on-year in September 2026, while diesel consumption indicated sustained domestic demand. Electricity supply remained strong through much of FY27, driven by intense summer demand and below-normal rainfall.
Consumption outlook faces headwinds
Consumption indicators remain encouraging, but October could mark a turning point as favourable base effects from last year's GST rate rationalisation begin to fade, SBICAPS said.
The pace of UPI transactions also moderated ahead of the proposed merchant discount rate (MDR) framework. While the festive season is expected to support spending, higher interest rates and subdued rural sentiment amid weak kharif sowing could constrain private final consumption expenditure (PFCE) in H2FY27.
Direct tax collections rise, fiscal deficit remains a concern
Net direct tax collections increased 13% year-on-year to ₹12.1 lakh crore as of September 17 in FY27 while gross collections rose 15.2% to ₹14.3 lakh crore, despite higher refunds. Net corporate tax collections grew 19.6% to ₹5.6 lakh crore while net non-corporate tax collections increased 6% to ₹6.2 lakh crore. Securities transaction tax collections also registered a significant increase.
Indirect tax collections, however, remained weak. SBICAPS expects the picture to improve from mid-October as the unfavourable base effect of last year's GST rate rationalisation wears off. Transfers from the Centre to states and Union Territories have also gathered pace.
Non-debt capital receipts increased sharply, supported by monetisation initiatives. While the government has kept revenue expenditure under control and continued to expand capital expenditure, higher food, and fertiliser subsidies pose upside risks to spending. The fiscal deficit has widened considerably year-on-year during the first five months of FY27, making achievement of the full-year target a key monitorable.
States' capex remains subdued
Capital expenditure by 23 states stood at ₹2.4 lakh crore during the first five months of FY27, up 10.2% year-on-year, but represented only 21.2% of their budgeted expenditure. Kerala, Himachal Pradesh, and Assam recorded relatively better progress while West Bengal and Uttar Pradesh were among the laggards.
Transfers from the Centre to states and Union Territories increased 11.4% to ₹5.9 lakh crore during the period. SBICAPS expects gross market borrowings by states to rise around 4.5% in FY27.
Foreign investors continue to withdraw funds
Foreign investor flows remained under pressure amid rising global bond yields and continued underperformance of Indian equities. Equity outflows during H1FY27 reached $13.6 billion, while debt markets recorded inflows of $4.6 billion.
External commercial borrowings mobilised under the RBI's special scheme amounted to $5.3 billion between June 8 and August 31, 2026. Total ECB registrations during the first four months of FY27 stood at $22.3 billion, with a substantial portion directed towards refinancing, on-lending and general corporate purposes.
Credit growth remains strong; RBI rate hikes possible
Bank credit growth remained broad-based, with lending to large industries growing 14.9% year-on-year as of August-end. Gems and jewellery, automobiles and engineering were among the sectors recording strong traction. SBICAPS expects credit growth to remain in high double digits through much of FY27.
The gap between credit and deposit growth narrowed sharply, with the deposit shortfall declining from ₹12 lakh crore to ₹2 lakh crore in three months, supported by estimated net FCNR(B) deposit inflows of around $115 billion. Private sector banks benefited disproportionately, reducing their weighted average fresh domestic term deposit rates by 40 basis points between June and August.
The report also expects the RBI's rate-tightening cycle to continue. The Monetary Policy Committee raised the policy rate by 25 basis points and changed its stance from 'Neutral' to 'Calibrated Tightening'. SBICAPS believes three to four additional hikes are possible, given that the real interest rate is projected to remain negative until the end of Q1FY28.