Govt support, benign inflation helped in Q1: Sonal Varma, Chief Economist, India & Asia (excl. Japan), Nomura

Sonal Varma, Chief Economist at Nomura India & Asia (excluding Japan), highlights the impressive resilience of India's economic growth in the first quarter of fiscal year 2027. Despite global energy price increases and geopolitical disruptions, domestic demand, especially consumption, has served as a crucial stabilizing force. The limited transmission of higher energy costs to retail fuel prices, combined with stable underlying inflation that preserves household purchasing power, has been instrumental in this regard.

Additionally, government-driven supply-side management and ongoing public capital expenditure have further bolstered activity.

These supportive factors have contributed to robust consumption momentum observed so far in fiscal year 2027. However, Varma anticipates a moderation in growth momentum as we progress into the second half of the fiscal year. Several factors could contribute to this slowdown. Firstly, firms have thus far managed to absorb part of the increased input costs by reducing margins.

This adjustment may eventually impact real purchasing power, particularly if the benefits don't fully trickle down to consumers. Secondly, delayed monsoon rains and reduced kharif sowing are expected to adversely affect agricultural incomes, which in turn could dampen rural consumption. Lastly, the government's planned expenditure consolidation in the latter half of fiscal year 2027, especially in the capital expenditure sector, could further temper activity.

Based on these considerations, Varma projects GDP growth to decelerate from around 7.3% in the first half of fiscal year 2027 to approximately 6.7% in the second half. Nevertheless, the overall growth for the fiscal year is still expected to remain robust at 7%.