India’s 8.2% GDP growth in Q2 FY26 has been greeted with understandable enthusiasm. In a world trembling under the weight of tariff wars, slowing global demand, and policy uncertainty, a number like this signals resilience. But numbers can seduce. Strip away the headline, and India’s growth story looks far more fragile than the celebratory narrative suggests. What we are witnessing is a momentum paradox: an economy accelerating at the surface while deeper macroeconomic anxieties build beneath.
The first contradiction lies in the nature of the growth itself. Real GDP has soared, but nominal GDP—what ultimately anchors fiscal arithmetic—is barely keeping pace. A deflator at 0.5% is not merely a statistical quirk; it is a flashing warning light. Low inflation may feel like a short-term gift, but it sharply erodes tax revenues just when the government is attempting its most ambitious fiscal consolidation in years. The budget assumed double-digit nominal growth. Against actual numbers closer to 8.5–9%, the fiscal gap is widening in real time. Either public spending gets trimmed further, or the deficit slips. Neither outcome is benign for an economy still dependent on state-led investment to sustain momentum.
The next layer of discomfort sits in demand dynamics. Household spending has undeniably firmed, helped by GST rationalisation, tax cuts and the festive season. But the composition is uneven. Urban discretionary consumption has woken up; rural demand remains patchy; and household leverage is quietly tightening its grip. Auto loan stress is rising, credit card defaults are inching up, and wage growth in labour-intensive sectors is anaemic. This is a consumption recovery running on borrowed time—literally.
Meanwhile, the government, constrained by its deficit glide path, has pulled back. Public consumption has contracted for the first time in years, and capital spending has slowed. That leaves private investment as the supposed engine of the next leg of growth. But the private sector is not blind to global and domestic uncertainties: the 50% tariff shock from the US, soft export orders, currency pressures, and narrowing bank margins all weigh on investment decisions. A revival is possible—balance sheets are healthier than before—but it is neither guaranteed nor imminent.
Manufacturing, often touted as the new growth frontier, tells a similarly complicated story. A 9.1% expansion sounds impressive until we acknowledge how much of it was front-loaded production ahead of tariff deadlines. Order books for labour-intensive exporters—textiles, leather, gems and jewellery—are already shrinking. In clusters like Tiruppur and Jaipur, small firms report shortened booking cycles and rising cancellations. The risk here is not incremental; it is existential. If the tariff regime persists, India could see a significant portion of export-linked manufacturing wiped out or relocated abroad, with employment consequences that will reverberate far beyond GDP tables.
Services remain the economy’s bulwark, and thankfully, their strength appears more structural. Technology, finance, logistics and professional services continue to expand, powered by digital infrastructure that few emerging economies can match. But even here, we must avoid complacency. Financial sector growth is coming alongside liquidity stress: credit is rising faster than deposits, squeezing margins and nudging lenders into costlier funding sources. Retail credit stress, still contained, could grow if job losses rise in export-linked sectors.
The external sector presents perhaps the most delicate vulnerability. Exports are losing steam just as imports, particularly of capital goods and intermediates, are picking up. While this reflects investment appetite, it widens the trade deficit and raises pressure on the rupee. If global conditions worsen—or if India fails to resolve its tariff standoff—the current account deficit could widen faster than policymakers anticipate.
Put simply, India’s growth right now is powered by consumption and services, with investment playing a cautious second fiddle and exports turning into a drag. That may hold for a couple of quarters, but not for years.
The real danger lies in mistaking momentum for durability. The economy is not “over-performing”; it is “over-extending”—relying on drivers that could falter simultaneously: a weakening fiscal cushion, a tariff-battered export base, overstretched households, and an investment cycle waiting nervously at the starting line.
Yet this moment also presents an opportunity. Policymakers can choose realism over euphoria: accelerate trade diplomacy, rebuild export competitiveness, recalibrate fiscal consolidation to avoid choking public investment, and safeguard financial system liquidity. India’s long-term fundamentals remain robust, but the short term demands vigilance.
The growth headline inspires confidence. The underlying story demands caution. The next six months will determine which narrative prevails.
Authored by Suketu Thanawala, Partner at StraCon Business Advisory & Consultancy Firm.
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