Indian Economy's Growth Overview (First Half of Financial Year 2025-26)
The Indian economy exhibited a robust growth performance in the first half of the financial year, surpassing expectations.
Growth Rate and Sectoral Contributions
- The gross domestic product (GDP) expanded by 8.2% at constant prices in Q2, leading to a first-half growth of 8%, up from 6.1% the previous year.
- The Reserve Bank of India (RBI) had projected a growth rate of 7% for Q2.
- Sectoral Contributions:
- Manufacturing: Grew by 9.1%
- Construction: Increased by 7.2%
- Tertiary Sector: Recorded a growth rate of over 9%
- On the expenditure side, private consumption increased by 7.9%, while investment growth slightly slowed to 7.3% from 7.8% in Q1.
External and Domestic Economic Environment
Despite an unsupportive external environment, the Indian economy performed remarkably well.
- The U.S. trade policy increased global economic uncertainty, impacting India with a 50% tariff.
- Future Outlook:
- Expected softening of growth in the second half.
- A potential trade deal and bilateral investment treaty with the U.S. could improve investment.
- GST rate adjustments effective from late September are expected to positively reflect in December-quarter numbers.
- Full-year growth could exceed 7%, considering global conditions.
Concerns and Future Implications
While real growth figures are strong, nominal growth levels have raised concerns.
- Nominal growth was 8.8% in the first half, with a small difference from real growth due to low inflation.
- Implications for corporate earnings and tax revenue were noted, with tax collection growing only 4% in April-October.
- The need for a growth rate over 20% in tax collection from November-March to meet targets poses challenges.
Medium-Term Considerations
The government's focus on the debt-to-GDP ratio adds complexity to the economic outlook.
- Sustained low nominal growth could pose challenges in achieving debt targets.
- The upcoming GDP base revision next year could impact policy decisions.
- The Monetary Policy Committee's upcoming meeting will consider recent inflation outcomes in their projections, making a rate cut unlikely at this growth pace.
