India’s GDP for Q2 FY2025-26 brought in another massive upside surprise, growing at 8.2% year-on-year. We now expect the full-year growth to be revised substantially upward, as the third-quarter numbers are likely to remain strong due to spending during festivities, buoyed by the rollout of GST 2.0 and slowing inflation.
India’s strong growth story is a reminder that when going gets tough, the tough get going. A stunning growth rate of 8.0% in the first half of the year, despite global headwinds, higher US tariffs on Indian exports, and volatility in capital flows, highlights the underlying strength of robust private consumption and investment, supported by easing inflation and favourable rural conditions.
Disposable income’s increasing
Private Final Consumption Expenditure (PFCE) grew by 7.9% in the second quarter of FY26, higher than 7.0% last quarter. The momentum is likely to continue this fiscal year, buoyed by decadal low inflation, increasing disposable incomes (as income tax and GST relief measures come into effect full force), better expected rainfall, and easing monetary policy stance.
Investment growth could have received a push from private sector
Gross Fixed Capital Formation (GFCF) rose by 7.3% in the quarter, up from 6.7% in the previous quarter. Capital expenditure utilisation has been strong, at 55.1% of the budgeted amount by October 2025, much higher than last year’s 42%.
Government-led capital expenditure has sustained demand; however, private investment could also have helped drive growth. Indian corporates have good cash holdings, and their balance sheets are well-deleveraged. Besides, the private corporates have the risk appetite, as outward FDI is rising fast. Yet global uncertainties and U.S. tariffs weigh on their domestic commitments. The challenge is channeling this capital back home to complement public spending and drive balanced, durable domestic investment growth.
Sustained consumption spending, coupled with capacity utilization at 74-75% should signal a strong case for private investment in India. The anticipated India–US and India–EU trade deals could further boost investor confidence, creating a fertile environment for businesses to commit capital and drive the next wave of growth.
Diversified export base provides a cushion
The headline export growth of 5.6% masks a two-part story: an increased frontloading before the US’s tariff hike, followed by a tapering in momentum once the higher duties, including the steep 50% tariff on select Indian goods, came into effect. While the global environment remains uncertain, India’s diversified export base across services, electronics, and pharmaceuticals, as well as its efforts to diversify export geographies, continue to provide a buffer.
Gross Value Added (GVA) rose by a strong 8.1% in Q2 FY26, with growth broad-based across sectors. Manufacturing posted a robust 9.1% growth, supported by firm domestic demand and ongoing capex momentum, as seen in the strong rise in IIP, the highest since the December 2023 quarter, which points to improving factory utilisation and healthier order flows. Agriculture, too, contributed positively, aided by a favourable kharif sowing season, timely monsoons and improved acreage, helping stabilise rural demand at a critical time.
Services are now the primary growth engine
The services economy grew 9.2%, driven by a 10.2% rise in financial, real estate and professional services, in line with the sustained strength seen in the services PMI through the quarter. Services are emerging as India’s strength, now contributing 48% of exports, up from 38% in 2019. With services accounting for 60% of GVA this quarter and driving a significant portion of urban demand, a swift India-US trade deal is crucial for mitigating the weight of uncertainties on this sector, as 55% of our global capability centres are linked to the US.
The swift interventions by the government, through the signing of FTAs with several nations, could help India better manage trade and investment uncertainties in the years to come.
RBI’s timing of the pivot will be crucial
With growth broadening and inflation easing, India enters a rare domestic sweet spot—even as external conditions remain challenging. The next key milestone will be the announcement of the monetary policy next week, and all eyes will be on the RBI’s move. Given the combination of strong GDP prints and still-benign inflation, the case for an immediate rate cut gets limited. The RBI’s task will be to time its pivot carefully, delivering support when global conditions tighten and when the domestic economy needs it the most.
(Rumki Majumdar, Economist and Director, Policy, Research and Insight, Deloitte India.)
Views are persona and do not represent the stand of this publication.
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