India's Economy to Grow at 6.5% in FY26: Report With a growing population and a shifting economic structure, India must boost spending on education and healthcare.
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India's economy is set to expand at a rate of 6.5% in the fiscal year 2025-26, continuing its steady growth momentum. For FY25, real GDP growth is projected at 6.4%, aligning with the revised estimates of the National Statistical Office (NSO).
The latest national accounts data indicate that India's real GDP grew by 7.6% in FY23 and 9.2% in FY24, with an expected 6.5% growth in FY25. However, to meet this target, the economy must achieve a 7.6% growth rate in the fourth quarter, which poses a challenge.
According to the EY Economy Watch report, achieving this growth would require a significant boost in private consumption expenditure, estimated at 9.9% in the last quarter—something that has not been observed in recent years. As an alternative, the report suggests increasing investment expenditure, particularly through government-led capital spending. Public infrastructure projects and policy support for private investment could play a crucial role in sustaining momentum.
The report also highlights fiscal management as a key concern. While the fiscal deficit may widen due to supplementary demand for grants, a higher nominal GDP could provide a cushion, offsetting some of the additional expenditure relative to GDP. A well-balanced fiscal strategy is necessary to support economic growth while maintaining financial stability.
Investment in Human Capital for Long-Term Growth
A major recommendation in the report is increasing investment in human capital to sustain long-term growth. With a growing population and a shifting economic structure, India must boost spending on education and healthcare. Over the next two decades, general government expenditure on these sectors needs to be raised to match levels seen in high-income countries.
The report estimates that education spending should increase from the current 4.6% of GDP to 6.5% by FY2048 to equip the workforce with necessary skills. Similarly, government healthcare spending must rise from 1.1% of GDP in 2021 to 3.8% by FY2048 to ensure improved healthcare access and outcomes.
Addressing Regional Disparities
Low-income states with younger populations will require additional fiscal support to meet their education and healthcare needs. The report suggests implementing equalisation transfers to ensure that states with lower fiscal capacity receive adequate funding for social sector investments. A phased approach to fiscal restructuring, supported by an increase in the revenue-to-GDP ratio from 21% to 29%, is recommended to generate the necessary resources while maintaining fiscal discipline.
DK Srivastava, Chief Policy Advisor, EY India, said, "India's changing age structure is expected to increase the share of working-age individuals in the total population. If productively employed, this can create a virtuous cycle of growth, employment, savings, and investment. To achieve this, India may need to raise its revenue-to-GDP ratio and gradually increase the share of government spending on health, education, and infrastructure."
The EY Economy Watch report concludes that a well-calibrated fiscal strategy, prioritising human capital development while maintaining fiscal prudence, could significantly enhance India's long-term growth trajectory.
