India’s GDP growth accelerated to a 6-quarter high of 8.2% YoY in Q2 FY26 from 7.8% in Q1 FY26. This is sharply in contrast to market expectations of a moderation in growth momentum towards ~7.3% (median from Reuters poll). Along similar lines, the supply-side estimate, as captured by the GVA data, also depicted a comparable outcome with Q2 FY26 growth improving to an 8-quarter high of 8.1% YoY from 7.6% in Q1 FY26.

Key internal highlights of Q2 FY26 GDP data

• Although domestic consumption moderated, there was divergence in the consumption momentum behaviour: 
  1. Private consumption expenditure gathered pace, which appears to have been supported by subdued inflation, steadily improving rural demand, and a gradual pickup in government transfer payments over the last 1-2 years.
  2. On the other hand, government consumption expenditure registered an annualized contraction of 2.7%, the lowest in 17 quarters. 
• Although investments posted a moderation, annualized growth at 7.3% under this category signals a somewhat healthy outturn.
  1. Capex disbursals by central and state governments (30.7% YoY) exceeded those by states (12.8% YoY), during Q2 FY26. The central government has been maintaining leadership in disbursing funds for public infrastructure vis-à-vis states since the pandemic. 
• Exports moderated a tad as Q2 data captured the partial impact of the US tariff disruptions*. Meanwhile, the contribution of net exports to GDP slipped further on account of a pick-up in imports. 
• On the supply side:
  1. At a broader level, improvement was led by the industrial sector, with support from manufacturing activities, where GVA jumped to a 6-quarter high of 9.1% YoY. Meanwhile, the value added in construction activity was broadly stable. 
  2. Momentum in the services sector remained steady, with incremental improvement in Financial, Real Estate and Professional Services (a sector that clocked double-digit growth). 
  3. The agriculture value-add moderated to a 5-quarter low of 3.5% YoY. Nevertheless, the run-rate is close to the long-period average and is likely to find a leg up from the healthy progress of sowing activity in the ongoing kharif season.

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* The US raised its tariff on India from 25% on Aug 6^th to 50% on Aug 27^th.

Inference and outlook

Over the last three quarters (Q4 FY25 to Q2 FY26), not only has GDP data shown acceleration, but it has also posted a sizeable positive surprise compared to the street expectations – the printed GDP growth has exceeded market consensus expectations by an average of 90 bps in the last three quarters. 

Notably, this outcome transpired against the backdrop of unprecedented geoeconomic and geopolitical uncertainties. The tectonic shifts in the world of merchandise trade (still unfolding), regional wars in West Asia, along with India’s short, albeit targeted conflict with Pakistan. Despite such extremely elevated global uncertainties, the resilience depicted in India’s GDP data is encouraging. There are a few factors that helped along the way:

• Favourable statistical base effect (to recall, the government formation and the budgetary process after the general elections last year had slowed down disbursals), coupled with strong front-loading of government capex.
  1. The central government disbursed 51.8% of its full-year capex target in H1 FY26, much higher than the 39.4% of actual disbursals in H1 FY25. 
• As observed in other countries, there was front-loading of merchandise exports from India to the US to beat the incidence of higher tariffs (applicable from Aug-25).
  1. India’s exports to the US expanded by a healthy 17.9% YoY between Apr-Aug FY26, before dipping sharply to -1.5% YoY between Sep-Oct FY26 as the impact of high tariffs started to impinge upon.
• Sharp drop in inflation not just provided a boost to sentiment and purchasing power, but more importantly, amplified the overall growth momentum via a lower deflator.
  1. The implied GDP deflator is estimated at 0.5% for Q2 FY26, the lowest since the pandemic.
  2. For Q3 FY26, there is a likelihood that the GDP deflator could slip into negative territory on account of continued softness in food prices and the trickle-down impact of GST cuts.

Out of the above three factors, the first two would not be durable from the perspective of the remainder of the financial year.

• Front-loading would imply rationalizing the pace of expenditure in the remaining period of the financial year to meet the budgeted target. In addition, a soft Nominal GDP growth could potentially lead to lower than budgeted tax revenue collections
  1. Between Apr-Oct FY26, gross tax collections accounted for 49.5% of the budgeted target vs. 53.6% of actuals in the corresponding period in FY25. The GST restructuring from H2 FY26 would also have some minor adverse revenue implications, which would need to be balanced against other sources of revenue or via curbing of expenditure.
• With India facing one of the highest tariffs in the world, its exports to the US will see a sharp reduction hereon. Although rupee depreciation and policy safety nets announced recently by the central government and the RBI would cushion the blow, Q3 FY26 is nevertheless likely to take a hit.

Having said, there are strong mitigants as well. 

• A favourable monsoon outturn is expected to provide a cyclical fillip to the agriculture sector, and in turn to the rural consumption demand. According to official estimates, kharif production is expected to have grown by 3% in AY26. The outlook for the ongoing rabi season remains encouraging with sowing up by 12.3% YoY for the week ending Nov 21, 2025.
• The accommodative monetary policy, juxtaposed with liquidity support and easing of regulatory restrictions, has begun to have first-order impact. Between Jan-25 and Oct-25, in response to the 100-bps cut in the repo rate and the 100-bps phased reduction in the CRR, the weighted average bank lending rate has moderated by 63 bps and 69 bps for outstanding and fresh loans, respectively.
• The announcement of massive GST restructuring from H2 FY25 would improve cost efficiencies for the manufacturing sector, while providing support to overall private consumption. This would double down the tax multiplier impact, which, in the form of income tax relief (announced in the FY26 Budget), has been in operation since the start of the fiscal year. 
• Last, but not least, trade negotiations between India and the US are currently underway. India has indirectly offered an olive branch by lowering imports from Russia and signing defence and energy contracts with the US in recent weeks. This provides optimism for an early resolution of the current tariff imbroglio between the two nations.

Taking into account the continued positive surprise in the GDP data along with lower-than-expected inflation in recent months, we mark up our FY26 GDP growth estimate to 7.2% from 6.6% earlier. In addition, we ascribe a further potential upside of 20 bps to the FY26 GDP growth estimate, contingent on the successful conclusion of the US-India trade agreement by Dec-25.

Chart 1: GDP growth posted its third consecutive positive surprise

Table 1: Snapshot of India’s GDP and GVA: Sectoral break-up

Note: Includes the following components: Change in Stocks, Valuables, and Discrepancies