India’s Q2 FY26 GDP growth of 8.2% has rightly attracted attention. It marks the strongest pace in six quarters and sits comfortably above the market expectation of 7.3%. The economy added close to ₹3.7 lakh crore in real output over the last year, with manufacturing and services both contributing to the expansion. For a world battling deceleration across major economies, India’s performance stands out.
Yet high growth numbers can sometimes obscure the underlying story. The latest data does not suggest an economy in distress, but it does point to one entering a more delicate phase. The real question isn’t whether India grew strongly this quarter — it undoubtedly did — but whether the drivers of this growth are durable enough to carry the economy through the next four to six quarters.
The tension begins with nominal growth. While real GDP expanded 8.2%, nominal GDP rose only 8.7%, dragged down by an unusually weak GDP deflator of 0.5%. This is the softest reading since 2019 and reflects a broader collapse in price momentum: CPI inflation is at 0.25%, and WPI has slipped into mild deflation at –0.1%. In most macro environments, low inflation is a welcome development. But in India’s case, subdued nominal growth makes the fiscal math considerably harder.
The Budget projected 10.1% nominal growth and a tax buoyancy of 1.1. Instead, buoyancy is at 0.32, forcing an improbable requirement of 22%+ revenue growth in the remaining months to meet the year’s targets. This pressure is already visible in the numbers: government consumption has contracted 2.7%, compared with 4.3% growth in the same quarter last year. Fiscal consolidation is necessary, but it has arrived at a moment when external risks are rising and private investment is only just beginning to recover.
Manufacturing, which expanded 9.1%, is an example of growth that looks better on paper than it feels on the ground. Yes, there is genuine momentum in sectors like capital goods, chemicals and automotive components. But a significant portion of the Q2 boost came from companies front-loading production ahead of the 50% US tariffs implemented on 27 August 2025. Export-heavy clusters — textiles, apparel, gems, leather — rushed shipments to avoid higher duties. This pulled demand forward but does not signal sustained strength. With new export orders slipping into the 48–50 contraction zone and the manufacturing PMI easing from 59.3 to 58.5, early signs of softening are already emerging.
If the tariff regime persists, exports to the US — roughly $87 billion last year — could fall toward $50 billion. That kind of decline risks shaving 0.7 to 1.0 percentage points off annual GDP growth, besides affecting employment in labour-intensive regions.
Services offer a more encouraging picture. The sector grew 9.2%, and the financial, real estate and professional services segment posted a robust 10.2%, its best in nine quarters. The deepening of digital public infrastructure continues to be a quiet structural game-changer: UPI has crossed 1 billion monthly transactions, and NPCI platforms handle over $2 trillion in annual value. These developments have improved financial access, especially for lower-income households.
But even here, there are pressure points. Bank credit is rising at 11.3%, faster than deposit growth at 9.7%, creating a 180 bps gap that narrows banking margins. Retail loan stress — in auto loans, particularly — is beginning to show in NBFC portfolios. None of this is alarming yet, but it suggests that households are carrying more leverage than the headline consumption numbers reveal.
Private consumption grew 7.9%, supported by GST rationalisation and tax cuts that lifted purchasing power, especially in essentials. But the acceleration is uneven. Urban discretionary demand — autos, hospitality, consumer durables — is improving, while rural consumption remains fragile. Agriculture grew just 3.5%, compared with 4.1% last year, reflecting monsoon unevenness. Some rural NBFCs are reporting 15–20% delinquencies in vehicle loans; rising household leverage could constrain consumption heading into next year once the festive tailwinds fade.
Investment trends mirror this unevenness. Gross Fixed Capital Formation rose 7.3%, hinting at a mild improvement in the investment cycle. The RBI expects private capex to grow 21.5%, reaching nearly ₹2.7 lakh crore this fiscal. But this revival is contingent on tariff clarity and stability in global demand. Public capex, by contrast, is under strain: government consumption has already declined, and fiscal consolidation limits the scope for further expansion. The result is an investment landscape where infrastructure and policy-supported sectors are holding up, but discretionary manufacturing capex remains uncertain.
The external sector is arguably the most immediate drag. Exports rose 5.6%, while imports jumped 12.8%, widening the trade gap. Merchandise exports grew only 4.2%, while services exports — rising 6–8% — continue to offer some insulation. Export orders in textiles now operate on 45–60 day cycles instead of the usual 120 days, an unmistakable sign of buyer hesitancy. A widening current account deficit, potentially reaching 1.8–2.0% of GDP, combined with capital outflows and tariff-related uncertainty, is likely to keep the rupee under depreciation pressure despite healthy forex reserves of over $660 billion.
Given these trends, growth moderation in the second half of FY26 is unavoidable. Q3 is likely to settle in the 6.5–7.0% range and Q4 closer to 6.0–6.5%. The full-year number of 7.0–7.2% will still place India among the fastest-growing large economies, but it will reflect a softening underlying momentum.
India’s structural strengths remain intact — a strong services base, rising digital adoption, stable macro fundamentals and a resilient financial system. But sustaining an 8%-plus trajectory requires policy clarity on tariffs, a more decisive private investment cycle and greater stability in global trade. Without these, India risks settling into a steady but sub-optimal growth band.
The economy is still running fast. The challenge is ensuring the ground beneath remains strong enough to support the next sprint.
Authored by Rohit Kumar Singh, Ph.D. (Economics), PMP.
