Consumption is expected to remain the primary driver of India’s economic growth in 2026, continuing to outpace capital expenditure (capex), as fiscal policy pivots toward supporting household demand and credit conditions improve, according to a report by Nuvama.
The report cites three main reasons for this trend. First, during periods of slower economic growth, consumption typically performs better than investment. Second, fiscal policy has clearly shifted in favor of consumption, a move reinforced by a revival in credit growth. Third, while income growth remains weak, demand from lower- and middle-income households is expected to be relatively stronger than that from higher-income groups.
However, the pace of consumption growth is likely to remain moderate. Subdued income growth and a weakening wealth effect are limiting broad-based demand expansion. As a result, consumption in FY26 is expected to be driven largely by leverage and government transfers rather than by strong gains in household incomes.
Despite these constraints, stronger demand from lower- and middle-income segments is expected to allow consumption to outperform capex. Recent increases in state government transfers—particularly women-focused direct benefit schemes—are providing support to consumption at the lower end of the income spectrum. The report cautions, however, that such transfers may come at the cost of reduced spending elsewhere, especially in capital expenditure.
On the investment front, capex is expected to remain subdued through 2026. Limited fiscal headroom is likely to restrict the government’s ability to significantly ramp up public investment. At the same time, large corporates are slowing investment plans amid weak revenues and profitability, reflecting a cautious approach toward new projects.
Household-led capex is also showing signs of moderation. The premium and high-end real estate segment has entered a soft patch, further weighing on overall investment activity. Combined with corporate caution, this trend is expected to keep capex growth restrained.
Overall, the report concludes that consumption will continue to outpace capex in 2026, with demand strength concentrated among lower- and middle-income households, while investment activity remains constrained by fiscal limitations and cautious corporate sentiment. (ANI)
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