Domestic Demand to Soften Growth Slowdown in H2, Says SBICAPS
According to research by SBI Capital Markets (SBICAPS), India’s economy is set to slow down in the second half of fiscal 2025-26 (H2 FY26) — but the softness should be cushioned by strong domestic consumption and steady government capital expenditure.
SBICAPS’ latest macro report highlights a set of dynamics shaping the Indian growth trajectory: While exports and private investment face headwinds from global trade tensions, internal demand drivers — especially households and public capex — remain robust. Their Q1 FY26 snapshot showed GDP growth at 7.8 % (real), reflecting a rebound in consumption and construction. 1
What does "growth slowdown in H2" mean?
Here’s how to interpret the phrase in lay-terms:
- The economy has already seen a strong start to FY26, but the momentum is expected to moderate in the latter half of the year.
- “Slowdown” here does not imply contraction — it means growth will be lower compared to the earlier period.
- Key triggers of moderation: a high base effect (once growth was already strong), weaker external demand (exports), and private investment reluctance.
- “Domestic demand cushioning” means that strong household spending + government infrastructure & asset-creation spending will act as a buffer.
Key Metrics & Trends
| Metric | Value / Indicator | Notes / Year-on-Year Change |
|---|---|---|
| Q1 FY26 real GDP growth | ~7.8 % | Strong start, per SBICAPS. 2 |
| Expected full-year growth (FY26) | ~6.2 % (nominal GDP ~8.5 %) | Moderation expected due to headwinds. 3 |
| Domestic consumption share of GDP | ~60 % (approximate)² | High consumption share supports cushioning. 4 |
| Government capital expenditure elasticity | ~1.17 | Indicates 1 % capex increase → ~1.17 % GDP effect. 5 |
What are the drivers behind the cushion?
- Household consumption: Strong demand from rural India and urban discretionary spending are holding up well, even though investment activity remains muted. 6
- Government capital expenditure (capex): Large-scale infrastructure and public assets spending by centre and states continues to drive economic activity in construction, materials and related industries. 7
- Services sector resilience: Sectors like trade, transport, hotels, finance, professional services remain relatively strong, which helps offset manufacturing softness. 8
- External premium buffer: Although export growth is under pressure (trade wars, tariffs), India’s large domestic base and growing service exports help lessen the impact of global shocks. 9
What are the risks and headwinds?
- Weak private investment (capex): Despite public spending, private sector capacity build-up has been muted — which could limit sustainability of growth. 10
- High base effect: With strong growth in previous quarters, comparing year-on-year will naturally yield lower rates even if absolute growth remains robust.
- Export/trade headwinds: Tariffs and global demand uncertainty can weigh on export-driven sectors such as textiles, autos, electronics. 11
- Inflation/nominal growth mismatch: If inflation rises, real growth could be squeezed; also nominal GDP growth appears moderate compared to real growth which may reflect base and deflator effects. 12
Implications for markets and policy
Given slower expected growth in H2, here’s what investors and policymakers should watch:
- Monetary policy: With growth slowing but domestic demand still strong, the Reserve Bank of India may have flexibility to cut rates or maintain an accommodative stance, provided inflation remains manageable.
- Equity markets: Sectors linked to consumption (FMCG, retail, autos) and public-capex (construction, cement, infrastructure) may outperform. Conversely, export-heavy or heavily leveraged capital goods firms may face headwinds.
- Corporate earnings: Expect growth moderation in earnings, especially from firms exposed to global demand or reliant on export orders. Domestic-oriented firms may fare better.
- Fiscal discipline: Sustaining high public capex without raising fiscal risk will be key. A sharp slowdown could test debt/fiscal buffers.
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On policy front, continuing support for consumption (e.g., tax cuts), accelerating reforms in GST and structural investment, and leveraging capex to crowd in private investment will be critical to avoid a sharper slowdown.
Investor Takeaway
Indian-Share-Tips.com Nifty Expert Gulshan Khera, CFP®, who is also a SEBI Regd Investment Adviser, observes that while India’s growth is expected to moderate in H2 FY26, the presence of strong domestic demand and public capex offers a cushioning effect that makes this slowdown manageable rather than alarming. For investors, the message is to tilt portfolios towards consumption and infrastructure-linked themes, maintain a quality bias, and avoid overexposure to segments vulnerable to global trade shocks.
Discover more insights and research at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
Related queries on India’s growth outlook
- What does domestic consumption mean in India’s GDP context?
- How does government capital expenditure drive growth?
- Why is private investment lagging despite strong policy push?
- How big is the impact of export headwinds on India’s growth?
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
