Past capex and robust rural demand will propel India’s economic growth: SBICap

New Delhi: India’s economic growth over the next 15 months may benefit from the lagged impact of past capital expenditure and strong rural demand amid slowing consumer spending, SBI Capital Markets Ltd (SBICap) said in a report on Wednesday.

India’s gross domestic product (GDP) growth slowed to 5.4% in July-September (the second quarter of 2024-25), the slowest in seven quarters. The government’s first advance estimate projects India’s GDP growth in FY25 at 6.4%, the weakest in four years.

According to economic growth estimates released by SBI Research on Wednesday, India’s GDP likely grew at 6.2-6.3% in the October-December.

Rural demand is expected to stay strong supported by a good monsoon, a robust kharif harvest, promising rabi sowing, and welfare schemes, according to SBICap’s ‘Navigating the Storm’ report. Kharif crops are sown during monsoon rains and harvested in October-November, while rabi crops are grown in winters and harvested in spring.

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SBICap added that private final consumption expenditure (PFCE), or consumer spending, in India, which accounts for more than 60% of India’s real GDP, lagged gross fixed capital formation (GFCF) growth for seven quarters before the September quarter.

Gross fixed capital formation is an investment in long-term assets used for producing goods and services in an economy.

“While increased Union Budget revenue expenditure garnered attention, total capex as a share of GDP has grown in FY26BE vs. FY25RE. This reflects a rejig of capex, not a cut, with increased support for Central Sector Schemes and strategic Ministry-level reallocations,” SBICap said in its report.

“The Union (government) expects its consumption stimulus and continued capex to generate a generous 10.1% y/y nominal GDP growth in FY26, all the while maintaining fiscal prudence. We see downside risks to this estimate given uncertainty about broad-based private capex and the near-term effects of asset price volatility,” it added.

Union finance minister Nirmala Sitharaman in her Budget for 2025-26 proposed capital expenditure at ₹11.21 trillion for FY26 after cutting the target to ₹10.18 trillion from ₹11.11 trillion for FY25. In July last year, ahead of the general election, Sitharaman had raised the capex target by 11.1% to a record ₹11.11 trillion for FY25.

Consumption boost and Trump tariffs

SBICap added in its report that the government’s proposed direct tax cuts would boost urban incomes, which could prove a key stimulus to boost overall consumption. 

SBICap also said the Reserve Bank of India’s decision earlier in February to cut its policy repo rate by 25 basis points to 6.25%, its first rate cut in nearly five years, along with delayed liquidity coverage ratio (LCR), could revive lending.

LCR is the share of liquid assets banks must hold to meet short-term obligations and withstand market disruptions.

“For the infrastructure and manufacturing sector, the deferral of higher provisions on project loans comes as an additional boon and could finally unshackle middling credit growth. Finally, the delay in the implementation of LCR norms till next fiscal will free up significant amounts for banks to lend,” SBICap said.

“These measures in unison constitute the monetary backing for growth in FY26. Apart from these, the street will carefully watch for RBI’s actions in the primary and secondary open market to gauge how much liquidity it allows and where it stands on the currency/growth trade-off,” it added.

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SBICap also noted that global output growth remained below historical trends and that proposed US policy shifts under its recently elected president Donald Trump could disrupt global supply chains and expose markets to dumping risks.

“Short-term, tariffs create a negative scenario due to supply chain disruptions and dumping risks from low-cost producers. Mitigation strategies include securing tariff exemptions through dialogue and strategically adjusting tariff and non-tariff barriers,” SBICap said. “Long-term, India could benefit from manufacturing domestication.”