India’s Q2 Growth Momentum Set to Outpace RBI Estimates

Why in the News ?

Economists project that India’s GDP growth for Q2 of FY26 will exceed the RBI’s estimate of 7%, potentially touching 7.3%—slightly below Q1’s strong 7.8% expansion.
Despite the late-August 50% U.S. tariff hike, India’s economic momentum remains resilient.

The uptrend is driven by:

• A broad-based rural recovery, supported by good harvest output and improving labour markets
• Rising urban demand, particularly in consumer durables, following GST rate cuts
• Positive spillovers expected to continue into Q3 FY26

Nominal Growth Trends • GDP vs GVA • Private Consumption Surge • Corporate Profitability • Public & Private Investment

Nominal Growth Softens, Creating Fiscal Pressures

• April–June data shows nominal GDP growth at 8.8%—a three-quarter low and below the Finance Ministry’s 10.1% budget assumption.
• Nominal growth = growth at current prices, incorporating inflation.
• Real growth reflects only changes in output, excluding price effects.

Economists warn that nominal GDP for Q2 and FY26 could drop below 8%, which may:

• Slow tax revenue growth
• Raise concerns over fiscal deficit management
• Push up the debt-to-GDP ratio

Fiscal Deficit: Gap between government expenditure and revenue (excluding borrowings).
Debt-to-GDP Ratio: Measures government debt relative to economic output; a rising ratio signals fiscal stress.

Thus, monitoring nominal GDP becomes critical for budget planning and deficit control.

GDP Expected to Trail GVA Owing to Weak Tax Growth

• In Q2 FY26, GDP growth is likely to be slightly below GVA growth, which is projected at around 8%.
• GDP = GVA + Net Indirect Taxes (GST – subsidies)
• GVA indicates total production and performance across all sectors.

During Q2:

• Net indirect taxes dipped year-on-year
• In contrast, these taxes had risen 10% in Q1
• This lower tax momentum explains why GDP may grow slower than GVA

Private Consumption Rebounds Strongly in Q2

Private consumption is expected to grow 8%—its fastest pace since Q3 FY25.

Key drivers include:

• Late-September GST reductions that boosted durable goods demand
• Low retail inflation at 1.7%, improving purchasing power
• Rural wage growth (~6%)
• Personal income tax cuts
• Listed companies reported a 7.8% rise in employee costs, supporting household spending

Consumption growth would have been even stronger had households not deferred purchases ahead of the GST cut.
(Recall: Q1 FY26 consumption already improved to 7%, up from 6% in Q4 FY25.)

Corporate Sector Posts Strongest Quarter in Two Years

Q2 FY26 has been the best-performing quarter for India Inc in nearly 24 months:

• Sales increased 6% YoY
• Profits rose 13% YoY
• Supported by:
  • Low retail inflation (1.7%)
  • Zero wholesale inflation, reducing input pressure
  • Limited impact of U.S. tariff measures

Healthy profitability is expected to support value-added growth, keeping FY26 GDP close to 7%, above the RBI’s 6.8% projection.

Government Capital Expenditure Surges; Private Capex Revives

• Central government capital expenditure climbed 31% YoY in Q2 to ₹3.06 lakh crore, sustaining investment momentum.
• Private sector participation in new investments strengthened—
  • 71% of fresh investments in H1 FY26 came from private players, up from 61% last year.
• Gross Fixed Capital Formation in Q1 grew 7.8%—
  • Lower than 9.4% in Q4 FY25
  • Higher than 6.7% in Q1 FY25

This signals early signs of a private investment revival, complementing strong public capex.