According to a recent forecast by ICRA Ratings, India's economic growth rate is expected to decelerate to 7% in the second quarter of FY26, down from 7.8% in the preceding quarter. This slowdown is attributed to underperformance in the services and agriculture sectors, coupled with a moderation in government expenditure and subdued services exports. Despite these challenges, the industrial sector exhibited resilience.
The Gross Value Added (GVA) for the services sector is projected to decline to 7.4% in Q2, compared to a high of 9.3% in Q1. This reduction is primarily due to decreased government spending and a slowdown in services exports, which dropped to $101.6 billion (8.7%) from $97.4 billion (10.1%) in the first quarter.
In the agriculture domain, the GVA likely reduced to 3.5% in Q2, slightly down from 3.7% in Q1. This figure is well below the 4.1% growth witnessed in Q2 FY25. While there was an increase in kharif sowing, adverse weather conditions, including floods and unseasonal rain between August and October, negatively impacted crop yields and harvesting processes.
The industrial sector, on the other hand, showed promising growth with GVA expected to rise to 7.8%, marking a five-quarter high from 6.3% in Q1. Factors such as inventory stocking, early festive demand, GST rate cuts, and a pre-tariff export surge to the US contributed to this positive trend.
ICRA's analysis indicates that reduced government spending may continue to impede GDP growth. Government gross capital expenditure (capex) moderated to 30.7% in Q2 from a robust 52% in Q1, although absolute monthly spending increased to ₹1.01 lakh crore from ₹91,700 crore. Additionally, the Centre's non-interest revenue expenditure saw a contraction of 11.2% in Q2, compared to a 6.9% rise in Q1. State-level capital expenditure, based on data from 22 states, fell by 4.6% in Q2, following a 23% increase in Q1, influenced by base effects.
The report also highlights changes in net indirect taxes, which contracted by 5.2% in Q2, compared to an 11.3% growth in Q1. This shift is largely attributed to reduced subsidies and revenue moderation. Consequently, the GDP-GVA gap reversed, moving from a positive 18 basis points (bps) in Q1 to negative 10 bps in Q2.
Looking ahead, Aditi Nayar cautioned that unless there is a significant increase in government capital expenditure and a reduction in tariff-related uncertainties, GDP growth may fall below 7% in the second half of FY26. While GST rate cuts may boost demand for non-durable goods, the trend of premiumisation in consumer durables could limit overall volume increases.
Kutos : AI Assistant!
