S&P and Fitch Warn on India Growth Amid Energy Stress

S&P Global Ratings and Fitch Ratings have issued stark warnings on India’s macroeconomic trajectory, projecting a sharp slowdown in gross domestic product expansion to 6.6% for fiscal year 2027. This deceleration is driven by compounding geopolitical friction in West Asia, escalating industrial input costs, and severe domestic monsoon deficits.

New Delhi: S&P Global Ratings on Wednesday, June 24, said energy stress, sub-par monsoon and slowing global growth will pull down India’s gross domestic product (GDP) growth to 6.6 per cent in the current fiscal.

The Indian economy recorded 7.7 per cent growth in the 2025-26 fiscal and 7.1 per cent in 2024-25.

“We project real GDP growth will slow to 6.6 per cent in the fiscal year ending in March 2027, compared with 7.7 per cent in fiscal 2026, amid the energy stress, expectations of a sub-par monsoon, and slowing global growth,” S&P said in its report.

S&P’s FY27 growth projection is in line with the Reserve Bank of India (RBI) estimate of 6.6 per cent.

The impact of El Nino has weakened monsoon rains, with the rainfall deficit widening to 43 per cent by June 22.

To deal with deficient monsoon, the government has drawn up state-wise contingency plans recommending alternative crops suited to deficient rainfall conditions.

India imports 88 per cent of its crude oil needs, and a rise in global prices increases its import bill and stokes inflation. Simultaneously, international credit rating agencies have evaluated key state-backed corporations managing this supply line. Fitch Ratings affirmed Indian Oil Corporation’s (IOC) Long-Term Foreign-Currency Issuer Default Rating at BBB minus with a Stable outlook, aligning it directly with the sovereign rating of India.

The agency underscores that IOC’s state backing and dominant market position keep sovereign credit risk contained. This evaluation reflects an “Extremely Likely” probability of state support under Government-Related Entities criteria, given that the government directly owns 51.5 per cent of IOC and appoints key board members.

In its report titled “Economic Outlook Asia-Pacific Q3 2026: AI-Exposed Markets To Outperform,” S&P said the region’s outlook is shaped by resilient global activity, energy market stress, and an artificial intelligence (AI)-driven tech export boom.

S&P said the impact of energy stress arising from the West Asia conflict is visible, as the industry faces a substantial rise in input costs and suppliers’ delivery time. Also, higher fertiliser prices weigh on food production and raise food prices. Fitch Ratings similarly flagged a sharp corporate earnings decline in fiscal 2027 due to geopolitical stress. The agency forecasts IOC’s EBITDA will drop by 50 per cent to 60 per cent in FY27 as higher input costs more than offset wide gross refining margins and compressed marketing profits. Retail prices have turned sticky despite a rise of 7 rupees to 7.5 rupees per litre since the conflict began.

Rising inflation is eroding purchasing power, thus depressing growth. Sharply higher fertiliser prices may weigh on food production and fuel food prices, S&P said. This directly threatens national energy security, considering IOC’s systemic role as India’s largest state-owned oil refining company and transport fuel retailer. A corporate default would trigger strong contagion risk, severely hurting funding access and borrowing costs for other government-related entities.

S&P said consumer inflation would be 0.5-0.6 percentage points higher in the third quarter in India, and it will rise to 5.1 per cent in the current fiscal year as manufacturers pass on higher energy costs to consumers, alongside recent increases in prices of petrol, diesel, and cooking gas. On the corporate finance side, net leverage is forecast to spike temporarily before stabilizing between 2.5 times and 3.5 times from FY28. Annual capital expenditure will remain elevated at 357 billion rupees in fiscal 2027 and 375 billion rupees thereafter to expand refinery and petrochemical capacity to over 13 million tonnes per annum by 2030. Free cash flow is expected to trend toward neutral by 2028 as these expansions conclude.

“We expect a policy rate hike in the second half of this fiscal year,” S&P said. Ultimate rating stability remains strictly contingent on the sovereign credit profile; a future downgrade of India’s sovereign rating or a visible weakening of state support would trigger a direct downgrade for the energy sector.

Future Outlook

Looking beyond the immediate bottlenecks of fiscal 2027, macroeconomists and rating agencies project a calculated recovery path for the Indian economy and its critical energy infrastructure. Fitch Ratings forecasts a substantial corporate earnings rebound of 20 per cent to 30 per cent in fiscal 2028, driven by an anticipation that global crude prices will revert toward long-term mid-cycle levels and gross refining margins will normalize around $6 per barrel.

Concurrently, governmental agricultural interventions via state-wise alternative cropping contingencies are designed to insulate the rural economy from long-term systemic damage. The medium-term fiscal trajectory indicates that headline inflation pressures will subside as manufacturing supply lines adjust to international logistics disruptions, allowing domestic consumer purchasing power to steadily recover by late 2027.

FAQs

What is S&P Global’s GDP growth forecast for India in FY27?

S&P Global Ratings has projected that India’s real GDP growth will slow to 6.6% for the fiscal year ending in March 2027. This estimate matches the official growth forecast released by the Reserve Bank of India.

Why is India’s economic growth expected to slow down in 2026-27?

The projected economic slowdown is primarily caused by energy market stress arising from conflicts in West Asia, an expanding domestic monsoon rainfall deficit linked to El Nino, and deceleration in global economic growth.

How is the West Asia conflict impacting Indian energy companies?

The geopolitical friction has significantly increased input costs and disrupted supplier delivery timelines. As a result, market analysts forecast that major state-backed entities like the Indian Oil Corporation will see an EBITDA contraction of 50% to 60% during fiscal 2027.

What is the current inflation outlook for India?

Consumer inflation is projected to accelerate to 5.1% during the current fiscal year. This upward pressure is driven by manufacturers passing higher energy expenses down to consumers, alongside rising prices for domestic petrol, diesel, cooking gas, and agricultural fertilizers.