India’s economy likely rebounded to 7.4% growth in FY26, investment powers recovery

GDP for FY26

• India's economy grew 7.3 percent in FY26, rebounding from 6.5 percent last year
• Growth driven by strong consumption, tax relief, and RBI rate cuts
• Next GDP estimates will use a revised base year, set for release on February 27

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India’s economy is estimated to have rebounded sharply in FY26, growing 7.4 percent compared with 6.5 percent in the previous fiscal year, according to data released by the government on January 7. The pickup marks a return to stronger momentum after a year of moderation and comes just weeks before a major methodological reset in national accounts.

The recovery was driven largely by investment and manufacturing. Investment emerged as a key growth engine, expanding at 7.8 percent  compared with the previous year when it grew 7.1 percent. In real terms, GFCF rose to its highest level of 33.8 percent of GDP compared with 33.7 percent the previous year.

Manufacturing grew a robust 7 percent from 4.5 percent in the previous year, even as tertiary sector kept the economy humming with a growth of 9.1 percent compared with 7.2 percent in FY25.

Tertiary sector now contributes 51 percent to the economy, its highest share since start of the series.

Construction, electricity and agriculture emerged as weak spots, with agriculture growth slowing to 3.1 percent from a high base of 4.6 percent the previous month.

Mining, construction and electricity recorded their slowest growth since the pandemic, with mining recording a contraction of 0.7 percent.

On the demand side, consumption growth tapered despite push from the government, as private final consumption expenditure grew 7 percent compared with 7.2 percent the previous year.

A combination of policy support and easing inflation, which together improved household purchasing power through much of the year, was expected to provide support.

The government’s decision to deliver income tax relief and rationalise GST rates during FY26 played a central role in shoring up consumption demand, even as external conditions remained challenging. Export prospects were weighed down by global trade uncertainty and tariffs, but domestic demand helped offset those headwinds.

Monetary policy was also expected to provide a strong tailwind. The Reserve Bank of India cut policy rates by a cumulative 125 basis points from 6.5 percent over the year, easing borrowing costs for households and businesses.

Quarterly data release for the first half of the year saw the economy grow at 8 percent, beating market estimates. Indian economy grew 8.2 percent in the second quarter--its fastest pace in six quarters.

The FY26 estimates assume added significance as they represent the final release under the existing GDP series with a 2011–12 base year. The next set of advance estimates, using a revised 2022–23 base, is scheduled for release on February 27. The transition is expected to incorporate newer data sources and updated methodologies, potentially altering growth dynamics for recent years.

In the near term, the current growth numbers will also feed directly into the government’s Budget preparations, with the Union Budget due next month. Policymakers are expected to lean on the stronger growth backdrop while calibrating fiscal priorities amid global uncertainty.

Looking ahead, most forecasters expect growth to moderate only slightly in the coming fiscal. Goldman Sachs has projected that India’s growth will ease to about 6.8 percent next year, while domestic ratings agency India Ratings and Research has forecast a similar 6.9 percent expansion.