Why in the News?

• India’s GDP growth for Q2 FY26 (July-September 2025) surged to 8.2%, marking a six-quarter high, driven by strong performance in manufacturing, construction, and financial services.

What’s in Today’s Article?

• India’s GDP Performance (Overview, Sectoral Performance, Consumption & Investment Trend, Growth Outlook, etc.)

Overview of India’s GDP Performance in Q2 FY26

• India’s economy outpaced expectations, recording 8.2% real GDP growth, significantly higher than the consensus forecast of around 7.3%.
• This marks the fourth consecutive quarter of acceleration, signalling robust economic momentum despite global uncertainties.
• The government attributed this growth to a combination of pro-growth reforms, elevated public investment, strong services activity, and rising private consumption, particularly after the recent GST rate cuts that boosted discretionary spending.

Sectoral Performance Driving GDP Expansion

• Manufacturing and Industry Rebound
  • Manufacturing GVA rose by 9.1% in Q2, the fastest in six quarters, reflecting higher industrial output, improved capacity utilisation, and resilient demand.
  • This compares to 7.7% in Q1 and just 2.2% in the same quarter of the previous fiscal.
  • Industry as a whole grew 7.7%, supported by robust construction activity (7.2% growth). Mining was the only laggard, contracting due to monsoon disruptions.
• Services Sector Continues Dominance
  • The services sector expanded by over 9% for the second consecutive quarter, led by:

• Financial, Real Estate & Professional Services: 10.2%
• Public Administration, Defence & Other Services: 9.7%

• These components played a pivotal role in pushing overall GDP beyond forecasts.

• Agriculture Shows Mild Improvement
  • Agriculture GVA grew 3.5%, supported by stable food inflation and better kharif output, though still lower than industry and services contributions.

Consumption and Investment Trends

• Private Consumption Strengthens
  • Private Final Consumption Expenditure (PFCE) grew 7.9%, up from 7% in Q1, driven by:

• Lower food inflation
• GST rationalisation
• Moderation in interest rates
• Improvement in rural demand

• Economists highlighted that lower inflation boosted discretionary spending, reinforcing consumption-led growth.

• Investment Activity Supported by Capex
  • Gross Fixed Capital Formation (GFCF) grew 7.3%, aided by:

• A 31% rise in government capital expenditure
• Early signs of revival in private investment
• Stronger credit flow to the industry

• Economists noted, however, that private investment remains sensitive to global risks, especially higher U.S. tariffs.

Fiscal and Nominal Growth Concerns

• Despite strong real growth, India’s nominal GDP growth slipped to 8.7%, a four-quarter low. Economists warned that low nominal growth could strain fiscal math, as tax revenues rose only 4% in the first seven months of FY26.
• To meet the budget target of 12.5% gross tax revenue growth, revenues must grow 22.3% in the remaining months of FY26, an ambitious requirement.

Revised Growth Outlook

• The Chief Economic Advisor revised India’s FY26 GDP growth projection to at least 7%, up from 6.3-6.8% previously.
• The RBI may also revise its 6.8% projection upward as the Q2 figure far exceeded expectations, especially ahead of the Monetary Policy Committee’s meeting.
• However, economists expect growth to moderate to 6.1% in the second half of FY26 due to normalisation of capital expenditure and global headwinds.

Macroeconomic Implications

• Monetary Policy
  • With retail inflation at 0.25% in October, the lowest on record, the RBI was widely expected to initiate a rate cut. The strong GDP print may influence the central bank’s rate trajectory, but does not diminish easing expectations.
• Demand-Side Resilience
  • The combined effect of falling inflation, consumption revival, and government spending indicates durable economic momentum.
• Global Risks
  • Persistent uncertainties, global slowdown, geopolitical tensions, and tighter trade conditions could weigh on export-linked sectors.