New Delhi [India], October 2 (ANI): India's economic growth could slow to 5.5-6 per cent in the second half of 2026-27 as government capital spending moderates after being front-loaded in the first half, with a weak rural sector, adverse base effect and an uncertain economic environment adding to the pressure, CLSA said in a report.

The report expects combined fiscal capital expenditure growth to slow sharply in the remaining seven months of FY27, after rising 13.2 per cent year-on-year in the first five months, while combined capex growth could moderate to around 4 per cent during September 2026-March 2027, compared with 5 per cent in the same period last year.

The report highlighted that fiscal spending was "front-loaded in FY27" adding that, "this, along with a weak rural sector, adverse base effect and an uncertain economic environment, could drag growth to 5.5-6% in 2HFY27 vs 7-7.5% in 1HFY27".

The report further said the central government's capital expenditure growth is expected to soften to below 5 per cent year-on-year between September 2026 and March 2027. It expects defence spending to pick up, while spending on railways and roads could remain stagnant or decline.

The moderation comes as the Centre's fiscal position has weakened in the first five months of the financial year. The central fiscal deficit reached 41.9 per cent of the full-year budget estimate in 5MFY27, the highest level in six years, after a sharp fall in receipts in August.

Total spending grew 10.5 per cent year-on-year in the first five months, slower than 13.8 per cent in the corresponding period last year. Capital spending excluding loans and advances, however, remained relatively strong at 15.2 per cent year-on-year growth in 5MFY27.

States' capital expenditure grew 10.4 per cent year-on-year in the first five months, compared with 15.4 per cent a year earlier. The slower pace at both the Centre and states led to combined fiscal capex growth of 13.2 per cent, down from 20 per cent in 5MFY26.

CLSA said the outlook would also depend on the rural sector and the broader economic environment. "Considering lower receipts and economic uncertainty, the best-case scenario would be for the centre to meet its spending targets this year," it said. (ANI)