With Q2 GDP growth at higher than expected 8.2%, FY26 growth seen at over 7%

With the economy growing at a higher-than-expected pace of 8.2% in the second quarter of the fiscal year, forecasts indicate that GDP growth for the full year will be more than 7%.

Official data released on Friday showed that the Indian economy grew at a six-quarter high of 8.2% in July-September 2025-26 from 7.8% in the first quarter of the fiscal and 5.6% in the second quarter of 2024-25. Sectors including agriculture, manufacturing, public administration and other services as well as financial services, real estate and professional services while the lower base boosted growth from a statistical perspective.

“Expectations for the full year are now 7% or higher… The picture looks like steady growth in the third quarter,” Chief Economic Advisor V Anantha Nageswaran said on Friday.

“The confluence of stable inflation, sustained public capital expenditures and reform momentum positions the economy to face risks, as reflected in the upward revisions to FY2026 GDP growth forecasts by various agencies,” he stressed, adding that ongoing structural reforms including implementation of labor laws, rationalization of the GST rate, new personal income tax regime, and deregulation initiatives continue to enhance efficiency and competitiveness.

The GDP estimates come at a time when the economy is facing the brunt of US tariffs at 50%. However, private consumption remained strong and grew by 7.9% in the second quarter of the fiscal, and the third quarter is also expected to witness strong growth with the GST rate cuts. Gross capital formation, an indicator of investments, also expanded by 7.3% in the second quarter, although at a slower pace than 7.8% in the first quarter.

Devendra Kumar Pant, Chief Economist, India Ratings, noted that the impact of US tariffs has started to be reflected in the growth of exports which grew by 5.6% in Q2FY20 on a week-on-week basis on 3.0% growth in Q2FY25, and on the other hand, imports grew by 12.8% in Q2FY26.

Most analysts expect the economy to grow by 7.2% to 7.6% in fiscal year 2026, but they cautioned the need to monitor the second half of fiscal needs due to the impact of US tariffs and are taking into account a 25 basis point interest rate cut by the Monetary policy Committee next week.

“Overall, the economy has performed well with exports growing at 11% in the second quarter. The headwind will be the impact of tariffs which will become more severe in October and November. The tailwind is the GST push which could cancel out and exceed. This will have to be watched going forward,” said Madan Sabnavis, chief economist at Bank of Baroda. “Based on conservative growth in the second half but including the impact of GST on consumption, we estimate growth to be in the range of 7.4 And 7.6% for the entire year.”

Pant of India Ratings said the Reserve Bank of India may move to ease by 25 to 50 basis points in the rest of fiscal 2026 to support nominal GDP growth. “GDP growth in FY26 may exceed Ind-Ra’s forecast of 7.0%,” he said.

Analysts also noted that while lower inflation helped keep prices low, it weighed on nominal GDP growth and could upset the fiscal deficit target of 4.4% of GDP and tax collection targets. Nominal GDP grew by 8.7% in the second quarter of fiscal year 2026 and by 8.8% in the first half of the fiscal year against the budget estimate of 10.1%.

“While the increase in real GDP is encouraging, a slowdown in nominal growth resulting from a significant decline in inflation could have negative impacts. For example, it complicates the achievement of tax targets, which are based on a 10.1% nominal growth assumption for the current fiscal year,” said DK Joshi, chief economist at Crisil.

However, the chief economic adviser said nominal GDP growth in the third and fourth quarters will be higher as the base effect fades and inflation rises. “We are now in the middle of reviewing estimates for FY26 and FY27, and we should wait for this exercise instead of speculating,” he added.