Understanding India's 8.2% GDP Growth in Q2 FY26

India’s GDP Performance in Q2 FY26

India's GDP growth for Q2 FY26, spanning July to September 2025, soared to 8.2%, marking a six-quarter high. This remarkable growth was primarily fueled by strong performance in sectors such as manufacturing, construction, and financial services.

Overview of India’s GDP Growth

The economy outperformed expectations, achieving 8.2% real GDP growth, significantly above the consensus forecast of approximately 7.3%. This achievement represents the fourth consecutive quarter of acceleration, indicating robust economic momentum despite prevailing global uncertainties.

The government credits this growth to a combination of pro-growth reforms, heightened public investment, vigorous services activity, and rising private consumption, particularly following recent GST rate cuts that have stimulated discretionary spending.

Sectoral Performance Driving GDP Expansion

Several sectors contributed significantly to this GDP expansion, particularly:

• Manufacturing and Industry: Manufacturing Gross Value Added (GVA) increased by 9.1%, the fastest growth in six quarters. This reflects higher industrial output, improved capacity utilization, and resilient demand. The overall industry recorded a growth of 7.7%, supported by robust construction activity (7.2% growth). Mining, however, faced challenges, contracting due to monsoon disruptions.
• Services Sector: The services sector continued to dominate, expanding by over 9% for the second consecutive quarter. Key areas included:
  • Financial, Real Estate & Professional Services: 10.2%
  • Public Administration, Defence & Other Services: 9.7%

Agricultural Trends

Agriculture GVA grew by 3.5%, supported by stable food inflation and improved kharif output, though this growth remains lower compared to industry and services contributions.

Consumption and Investment Trends

Private consumption has shown a strengthening trend, with Private Final Consumption Expenditure (PFCE) growing by 7.9%, up from 7% in the previous quarter. This increase was driven by:

• Lower food inflation
• GST rationalization
• Moderation in interest rates
• Improved rural demand

Economists noted that lower inflation has bolstered discretionary spending, reinforcing a consumption-led growth trajectory.

Investment Activity

Gross Fixed Capital Formation (GFCF) rose by 7.3%, supported by a 31% surge in government capital expenditure and early signs of revival in private investment. However, economists caution that private investment remains sensitive to global risks, particularly concerning higher U.S. tariffs.

Fiscal and Nominal Growth Concerns

Despite strong real growth, nominal GDP growth dipped to 8.7%, a four-quarter low. Economists warn that this low nominal growth could strain fiscal math, with tax revenues increasing only 4% in the first seven months of FY26.

To achieve the budget target of 12.5% gross tax revenue growth, revenues must increase by 22.3% in the remaining months of FY26, which is an ambitious requirement.

Revised Growth Outlook

The Chief Economic Advisor has revised India's FY26 GDP growth projection to at least 7%, up from the previous estimate of 6.3-6.8%. The Reserve Bank of India (RBI) may also adjust its 6.8% projection upward, considering that the Q2 figure significantly exceeded expectations.

However, economists expect growth to moderate to 6.1% in the latter half of FY26 due to normalizing capital expenditure and facing global headwinds.

Macroeconomic Implications

With retail inflation recorded at 0.25% in October, the lowest on record, the RBI is expected to consider a rate cut. The robust GDP performance could influence the central bank's future rate trajectory, although easing expectations remain intact.

The combined effect of declining inflation, a revival in consumption, and government spending reflects strong economic resilience. However, persistent global uncertainties, geopolitical tensions, and tighter trade conditions may impact export-linked sectors.

Frequently Asked Questions (FAQs)

Q1. What drove India's GDP growth in Q2 FY26?
Answer: India's GDP growth of 8.2% in Q2 FY26 was primarily driven by strong performance in manufacturing, construction, and financial services, alongside increased private consumption and public investment.

Q2. How did the services sector perform in Q2 FY26?
Answer: The services sector expanded by over 9%, with significant contributions from financial services and public administration, demonstrating its dominance in the economy.

Q3. What are the implications of low nominal GDP growth?
Answer: Low nominal GDP growth at 8.7% may strain fiscal policies, as tax revenues need to rise significantly to meet budget targets, creating potential challenges for government finances.

Q4. What is the forecast for India's economic growth in FY26?
Answer: The revised forecast for India's FY26 GDP growth is at least 7%, with expectations of moderation in the second half due to normalizing capital expenditure and global economic factors.

Q5. How does inflation affect the RBI's monetary policy?
Answer: With retail inflation at a record low of 0.25%, the RBI may consider rate cuts. However, strong GDP growth could influence the direction of future monetary policy actions.