New Delhi [India], November 19 : India's economic growth will remain firmly anchored by domestic demand even as external conditions stay uncertain, Morgan Stanley said in its 2026 India Economics Outlook, projecting a "continued Goldilocks environment" for Asia's third-largest economy.
The report forecasts real GDP growth of 6.8 per cent in FY26 and 6.5 per cent in FY27-28, driven primarily by an uptrend in household consumption, improving urban sentiment, and a broadening investment cycle.
"The growth trajectory will be supported by a broadening of domestic demand, while external demand remains clouded by uncertainty," the research note states.
Morgan Stanley notes that a pivot in monetary and fiscal policy is helping revive urban consumption, which had softened due to high real interest rates and sluggish hiring trends.
With 100 bps of rate easing in 2025 already transmitted and additional tax reforms, including income tax cuts worth Rs1 trillion and GST rationalisation, disposable incomes are rising.
At the same time, rural demand remains buoyant, supported by record agricultural output, favourable rainfall, and rising real wages. The report highlights that real rural wages have grown 3.1 per cent in calendar year 2025, till date (CYTD25), compared to 1 per cent in 2024.
Morgan Stanley says India's post-pandemic capex cycle, initially led by public and household investments, is now expanding as private sector spending begins to pick up. Capacity utilisation has stayed above the long-term average for the past year, while new private investments are gaining traction in sectors such as clean energy, data centres, semiconductors, electronics, EVs, industrial real estate and healthcare.
A recent RBI study cited in the report suggests a rise in private project financing to Rs 2.7 trillion in FY26, up from Rs 2.2 trillion a year earlier.
Goods exports remain fragile, growing only 0.9 per cent in CYTD25, with sectors such as textiles, leather, and gems & jewellery seeing pressure, especially after the US imposed 50 per cent tariffs on several Indian products from August 27. Exports to the US fell sharply, declining 20 per cent month-on-month in September.
However, services exports remain more resilient, up about 11 per cent in CYTD25, but face uncertainties from US immigration policy changes such as the steep hike in H-1B visa fees to USD 100,000 and the proposed HIRE Act, which would impose a 25 per cent excise tax on offshore services.
Despite external risks, macro-stability indicators remain "in the comfort zone," the report notes. CPI inflation is expected to align with the RBI's 4 per cent target by FY27, while the current account deficit should remain at or below 1 per cent of GDP. Forex reserves and low external debt are projected at 18.3 per cent of GDP in FY27, which provides an additional buffer.
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