India’s Growth Momentum Strengthens as Economy Posts Six Quarter High at 8.2%

InduQin
2 days ago
3 min read

India’s economy grew 8.2 percent in Q2 FY26, driven by strong manufacturing and services. Consumption and investment stayed firm despite lower government spending, while imports outpaced exports. Nominal growth eased due to low inflation. With first‑half growth near 8 percent, India remains on track to exceed 7 percent for FY26, though some moderation is expected ahead.

India’s economy continued its impressive run in the July–September quarter of FY26, expanding by 8.2 percent—a pace not seen in a year and a half. The latest official figures place growth well above both market expectations and the Reserve Bank of India’s 7 percent forecast, marking the third straight quarter of strong performance.

Economists had widely anticipated some cooling after the previous quarter’s 7.8 percent rise, but services and manufacturing delivered an unexpected lift. According to ICRA’s chief economist Aditi Nayar, the latest numbers reflect broad-based resilience, with services providing the biggest boost while agriculture and industry largely met earlier projections.

With momentum holding up across key sectors, India appears on track for full‑year growth exceeding 7 percent, assuming activity remains steady through the remainder of FY26.

PwC India’s Ranen Banerjee attributed the upside to front‑loaded export production, solid rural demand, robust government outlays, and unusually low inflation that helped push up real growth.

Manufacturing and Services Lead From the Front

Gross value added (GVA) rose 8.1 percent in the second quarter, up from 5.8 percent a year earlier. Manufacturing registered a strong 9.1 percent rise, a marked improvement from last year’s muted expansion and slightly ahead of the previous quarter, with pre‑festive inventory buildup playing a contributing role.

Financial, real estate, and professional services continued to be the standout performers, recording a nine‑quarter high of 10.2 percent. Trade, hospitality, transport, and communication services grew 7.4 percent, maintaining the steady pace seen over the past year, while construction expanded 7.2 percent on the back of heavy public investment and vitality in the real‑estate market. Utilities grew at a slower 4.4 percent, and mining activity remained stagnant. Agriculture and allied sectors managed 3.5 percent growth, broadly in line with recent trends.

Consumption Stays Firm as Investments Hold Steady

Household spending, measured through private final consumption expenditure, climbed 7.9 percent despite the rollout of GST changes during the quarter. Investment activity also remained healthy, with gross fixed capital formation increasing 7.3 percent, only slightly slower than in Q1.

Government consumption, however, slipped 2.7 percent, reflecting the Centre’s and states’ push toward fiscal consolidation. Even with this drag, overall GDP growth strengthened, underscoring the dominant roles of private consumption and capital formation.

External trade weighed on the numbers: while exports grew 5.6 percent, imports surged 12.8 percent, widening the real trade deficit. This pattern aligns with the IMF’s recent assessment that domestic demand continues to anchor growth even as global uncertainties and U.S. tariff measures pose risks.

Nominal Growth Slows, Raising Fiscal Questions

Nominal GDP growth eased to 8.7 percent, the slowest in four quarters, and only marginally above real growth. Analysts note that such weak deflator readings—driven by subdued CPI and WPI inflation—could affect fiscal calculations. EY India’s DK Srivastava highlighted that nominal growth for the first half of FY26 averages just 8.8 percent, implying extremely low inflation through the GDP deflator.

Outlook: Strong First Half Provides Cushion

With first‑half real growth averaging roughly 8 percent, India enters the second half with a buffer against expected moderation. Base effects and a likely rebound in the deflator could slow momentum, but FY26 growth still appears set to surpass 7 percent comfortably.

Nayar noted that the strong Q2 reading reduces the odds of an immediate rate cut by the Monetary Policy Committee, even with very low inflation. However, some economists, such as Kotak Mahindra Bank’s Upasna Bhardwaj, still expect a small reduction in policy rates given the benign inflation trajectory.

Consensus forecasts suggest growth may taper in Q3 and Q4 yet average around 6.9 percent for the full year, a touch higher than the RBI’s projection. If current trends persist, the economy could expand by approximately 7.2 percent in FY26—another year of robust performance in an uncertain global environment.

As manufacturing shines and services hold