Why India’s Growth Story Holds Firm Against 2026’s Global Risks?

India is expected to enter 2026 with real GDP growth of around 7–7.3%, making it one of the fastest-growing large economies globally. However, macro data suggests the nature of growth is evolving, from a broad-based rebound to a more targeted, domestically driven expansion.

Nominal GDP growth is moderating even as real growth holds up, reflecting lower inflation and tighter pricing power. This divergence is shaping government revenues, corporate earnings expectations and market valuations going into 2026.

Domestic Demand Emerges As The Key Growth Pillar

Data from the HDFC Mutual Fund Yearbook 2026 indicates that domestic demand will be the primary growth driver in 2026, supported by a cumulative fiscal push estimated at nearly 3% of GDP between FY25 and FY28.

This includes:

• The likely rollout of the 8th Pay Commission, expected to inject close to $60 billion (₹5 trillion) into household incomes
• State-level welfare spending is estimated at over ₹3 lakh crore annually
• GST rate rationalisation leading to revenue foregone of around ₹1.8 lakh crore, boosting disposable incomes

Together, these measures are expected to support consumption across housing, automobiles, discretionary goods and services.

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Public Capex Remains Elevated Despite Fiscal Consolidation

While year-on-year growth in capital expenditure may slow, absolute public capex levels remain high, according to the report. 

Central government capex has risen from ₹4.4 lakh crore in FY20 to over ₹11 lakh crore in FY25, with states increasingly stepping up infrastructure spending. Roads, railways, defence production and urban infrastructure continue to account for a large share of investment.

For 2026, economists expect capex to remain a growth anchor, even as the government balances fiscal consolidation with welfare spending.

Manufacturing Shift Gathers Momentum

Manufacturing is expected to remain a medium-term growth theme rather than a short-cycle play.

India’s share in global manufacturing exports remains below 2%, indicating room for expansion. Policy measures such as PLI schemes, supply chain diversification away from China, and rising domestic demand are driving capacity creation in sectors such as electronics, defence manufacturing and specialty chemicals.

However, export-led manufacturing growth could remain uneven in 2026 due to global trade uncertainty.

Household Savings Shift Towards Financial Assets

Indian households are steadily increasing exposure to financial assets. Mutual fund SIP inflows remain robust, and domestic institutional investors now play a dominant role in equity markets.

At the same time, gold has added significantly to household balance sheets. In calendar year 2025 alone, rising gold prices added an estimated ₹110–117 lakh crore to household wealth, creating a strong wealth effect that could support consumption and financial risk-taking in 2026.

This shift is reducing India’s reliance on volatile foreign portfolio flows.

Markets Move Into A Selective Phase

Equity markets corrected meaningfully in 2025, with valuations compressing closer to long-term averages. Small and mid-cap stocks saw sharper corrections, with nearly 30% of small-cap stocks down more than 30% from their peaks.

As India enters 2026, market participants expect:

• Lower index-level returns
• Greater focus on earnings visibility
• Preference for balance sheet strength and cash flows

The environment is likely to reward stock selection over broad market rallies.

Monetary Support Fades, Liquidity Remains Supportive

The Reserve Bank of India has already delivered 125 basis points of rate cuts, easing borrowing conditions across sectors. While further aggressive cuts appear unlikely, liquidity conditions are expected to remain supportive.

This implies that growth in 2026 will rely more on fiscal support and private investment rather than incremental monetary easing.

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