Private consumption to remain key growth driver in FY27 as spending momentum holds
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Private consumption is expected to remain the major driver of India’s economic growth in FY27, supported by low inflation, rising real wages and policy measures that improve household disposable income, according to India Ratings and Research (Ind-Ra).
The rating agency projects Private Final Consumption Expenditure (PFCE) to grow 7.6% year-on-year in FY27, slightly higher than the estimated 7.4% growth in FY26 and 7.2% in FY25.
PFCE contributes around 55.9% of the GDP of India, making it the largest demand side factor affecting growth.
“On the demand side, PFCE, after remaining subdued at 5.6% in FY24, recovered to 7.2% in FY25 and improved further to 7.5% in 1HFY26. While rural demand has remained resilient, urban demand is a drag on the overall consumption demand,” Ind-Ra said.
Rural strength mitigates urban weakness
According to Ind-Ra, the demand in the rural sector has held up while the demand in the urban sector is still weak. This is partly due to the strong performance of the agricultural sector. The agricultural Gross Value Added had been growing at more than 3.5% for five successive quarters from 2QFY25 to 2QFY26 with an average of 4.7%.
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Favorable weather and rabi crops sowing numbers also support agriculture sector growth in 3QFY26 to 1QFY27. This adds to our hopes for a continued demand trend from rural areas.
A low inflation rate increases real incomes
According to the report, an important element contributing to consumption is that inflation has plummeted in FY26. With reduced inflation, real wage growth is positive, especially in the rural areas, where agricultural wages have been positive since 2QFY25. For the urban areas, the real minimum wages turned positive from 4QFY25 and stood at 1.3% in 2QFY26.
Ind-Ra expects inflation to remain benign in FY27, with average retail inflation projected at 3.8%, well within the Reserve Bank of India’s target range. Controlled inflation is also expected to continue to support purchasing power and consumer spending.
Services dominates the consumption
Report said that over 50% of PFCE accrues to services, which grows largely due to the robust growth in the services sector. Services GVA is forecasted to grow 8.1% in FY27, slightly lower than 8.3% in FY26, but substantially higher than the growth in the agricultural and industrial sectors.
“While India’s exports of goods and services (in USD) grew 5.5% yoy during 8MFY26, primarily due to the sluggish merchandise exports because of US tariffs, services exports witnessed steady growth, " the report said.
However, with service sector growth fueled by a rising trend in incomes, it is likely that consumption expenditure will remain strong, defying the effects of global uncertainties on exports.
Support through policies to increase disposable incomes
Research suggests that policy actions may also help to drive momentum in consumption spending. The cut in the income tax announced in the Budget for FY26, as well as GST rationalization, proposed in September 2025, may help to boost disposable income, which will then support spending in FY27.
Ind-Ra believes these domestic parameters will help consumption continue to drive growth in India in FY27 despite challenges from international trade disruptions, among others.