India's Economy on the Road to Recovery: What to Expect in 2026

Introduction to India's Economic Challenges

India faced significant economic challenges in the fiscal years 2025 and the first half of 2026. The government tightened its spending, which led to a slowdown in the economy. The Reserve Bank of India (RBI) also took steps to control excessive lending, especially in the retail sector. This resulted in a decrease in the country's economic growth rate.

Impact on the Economy and Stock Market

The slowdown in the economy had a negative impact on corporate earnings, with the Nifty EPS growth falling to 3.3% in 2025. The stock market also felt the effects, with the Nifty index correcting by 10% from September 2024 to March 2025. Small- and mid-cap stocks were hit even harder.

Change in Policy and Its Effects

In 2025, the RBI started cutting interest rates, which helped to boost the economy. The government also introduced the GST reform in October 2026, which is expected to have a positive impact on the economy. The reform simplified procedures and reduced rates on many consumer goods, making them more affordable for people.

Sectors to Watch in 2026

The effects of these measures are already being seen, with auto sales increasing by 20% in October and November 2025. The demand for cars is expected to remain strong, driven by the GST cut, which has made entry-level cars more affordable. Other sectors, such as consumer discretionary and autos, are also expected to perform well.

Key Sectors for Investment

• Autos: The sector is expected to see a 2-3 year cyclical growth, driven by passenger vehicles, commercial vehicles, and tractors.
• Consumer Discretionary: The sector is expected to benefit from the GST cut and the overall increase in consumer spending.
• Internet: The sector is expected to grow, driven by India's affordable data and deep smartphone penetration.

Risks and Challenges

One of the key risks to the market is the external account, which has been impacted by the US's high tariffs on India. This has led to a depreciation of the rupee and has put pressure on the RBI to maintain banking liquidity. A resolution of India-US trade issues is necessary to address this challenge.

Conclusion

Overall, 2026 is expected to be a strong year for Indian equities, with the Nifty index likely to deliver a 10-12% return. Small- and mid-caps are expected to outperform, driven by higher growth and strong balance sheets. However, there are risks and challenges that need to be addressed, including the external account and the impact of US tariffs on India.