After the United States imposed a steep 50 per cent tariff on Indian goods on August 27, dismay and concerns over India’s growth outlook intensified across markets, policy circles and industry.
Several analysts moved swiftly to revise their projections downward, expecting GDP growth to slip closer to 6 per cent for 2025–26. The tariff shock, aimed largely at labour-intensive sectors such as textiles, jewellery and seafood, introduced a fresh layer of uncertainty at a time when global trade was already weakening under the weight of geopolitical tensions, rising protectionism and softening demand in major economies. The fear was that such a significant tariff escalation by India’s largest export market would create ripple effects, dampen export competitiveness, weaken external demand and eventually feed into slower domestic growth.
Yet, contrary to these subdued expectations, India’s economic performance in the first half of the fiscal year has proven decisively stronger. Far from slipping toward the pessimistic forecasts, the economy is now on course to deliver real GDP growth of nearly 7.5 per cent in FY26, buoyed by an unexpected 8 per cent expansion in the first two quarters. This resilience in the face of external adversity underscores the strength of India’s domestic economic fundamentals and its ability to sustain growth momentum even when global conditions turn adverse. The stronger-than-anticipated outturn also highlights the effectiveness of policies that have sought to build internal demand, diversify the production base and maintain macroeconomic stability.
The latest national accounts data released by the Government of India show that the economy’s momentum strengthened sequentially through the first half of FY26. Real GDP grew 7.8 per cent in the first quarter and accelerated to 8.2 per cent in the second, comfortably surpassing expectations and reinforcing confidence in the economy’s underlying trajectory.
The sustained expansion reflects a combination of long-term structural drivers—including over a decade of investment in physical and digital infrastructure, tax rationalisation measures that have simplified the indirect tax regime and improved compliance, and a steady pipeline of public capital expenditure—as well as cyclical factors such as benign inflation and robust domestic demand. The sharp moderation in inflation during the second quarter created additional fiscal and monetary space, helping firms and consumers navigate the global slowdown with greater confidence and ensuring that real purchasing power remained intact.
Much of the strength in the second quarter emerged from manufacturing and services, the two largest contributors to gross value added. Manufacturing gross value added rose 9.1 per cent in Q2, up from 7.6 per cent in Q1 and significantly higher than the muted 2.2 per cent recorded one year earlier. The organised sector spearheaded the revival, with industries such as steel, cement, motor vehicles, tyres and garments registering meaningful growth across production lines. A more accommodative monetary environment, gradual improvements in financial conditions, and recent steps toward GST rationalisation have collectively supported this industrial recovery. Manufacturers have also benefited from relatively stable input prices and improved logistics performance as global supply chain pressures eased compared with the past two years.
Services, which account for more than half of India’s GDP, continued to expand strongly, growing 9.2 per cent in the second quarter. Financial and real estate services, along with business and professional services, recorded growth of over 10 per cent, reflecting stronger credit flows, increased activity in the real estate market and healthier corporate balance sheets that have supported higher operational capacity.
Public administration and defence services grew 9.7 per cent, supported by higher government spending and the normalisation of administrative activities as public programmes and services expanded. A revival in IT-enabled services and strengthening demand for consultancy and professional services have further contributed to the sector’s buoyancy, underscoring India’s comparative advantage in high-skilled service exports and the breadth of its growing knowledge economy.
On the demand side, the two dominant components of GDP—private consumption and investment—remained robust. Private Final Consumption Expenditure, which constitutes roughly 62 per cent of India’s GDP, expanded by 7.9 per cent. This improvement was broad-based, spanning both rural and urban markets. Higher agricultural incomes following favourable crop output helped support rural demand, while the impact of GST reductions on several mass-consumption items enhanced affordability and lifted urban spending. The natural uptick in demand during the festive period also contributed to stronger consumption levels. The continued rise in UPI transactions and improving FMCG sales data suggest that underlying consumer sentiment remains firmly positive and that the expansion is not restricted to a few categories but is being observed across a broad consumption basket.
Investment demand also showed resilience. Gross Fixed Capital Formation grew 7.3 per cent, reflecting ongoing strength in construction and infrastructure activity. Central government capital expenditure registered a sharp 31 per cent increase, reinforcing the administration’s commitment to investment-led growth. Imports of machinery and equipment recorded double-digit growth, pointing to the continued expansion of the manufacturing base and improving business expectations. Listed corporate sector data suggest that companies are entering a phase of balance-sheet strengthening, driven by product diversification, better utilisation rates and an improved pricing environment. These factors together set the stage for a pick-up in private sector investment in the latter half of the year, especially as capacity utilisation improves further.
The improvement in real GDP growth in the second quarter was aided significantly by softer inflation. Both CPI and WPI inflation moderated, narrowing the gap between nominal and real GDP growth. Retail inflation fell to its lowest point since the current CPI series began, while core inflation remained stable. The easing price environment reduced pressure on input costs and supported purchasing power, giving households and firms greater room to manoeuvre. With inflation firmly within the Reserve Bank of India’s comfort zone, macroeconomic stability was reinforced, encouraging healthy economic activity across sectors.
High-frequency indicators during September and October indicate that the economy’s momentum remains broad-based. E-way bill generation expanded sharply, reflecting stronger movement of goods across states and improvements in tax compliance. Purchasing Managers’ Index readings for both manufacturing and services remain comfortably above pre-pandemic averages, suggesting continued expansion in business activity. Port traffic has grown at double-digit rates, complemented by record freight earnings for Indian Railways, indicating vibrant trade and logistical activity. Petrol and diesel consumption have rebounded, reflecting healthier transportation and travel demand. Tractor sales in October rose to an eleven-year high, signalling strong agricultural sentiment, while urban consumption also accelerated as GST rationalisation improved affordability across a range of products. Financial indicators suggest improved household balance sheets, with financial liabilities declining through FY25.
Agriculture has remained stable despite global uncertainties. As of late November, rabi sowing was progressing ahead of last year, with acreage rising for major crops such as wheat and gram. Foodgrain production for 2024–25 is estimated to have reached record highs, supported by favourable monsoon patterns, adequate fertiliser and seed availability, and strong procurement operations. Reservoir levels across the country are above long-term averages, ensuring sufficient irrigation for the cropping season. Rice procurement for the current marketing year has already surpassed last year’s figure, adding to the sector’s stability and helping maintain food security.
The rationalisation of GST rates on various consumer goods has played an important role in rebalancing rural and urban demand. Lower rates on automobiles, appliances, FMCG products and essential goods have made key categories more affordable, enabling a broader and more sustained consumption revival. Retail sales of two- and three-wheelers have picked up sharply, reflecting higher purchasing power and improved mobility. Passenger vehicle sales have also strengthened during the festive season, supported not only by GST cuts but also by improved financing conditions and greater consumer confidence.
Reform momentum remains strong. The implementation of the four labour codes on wages, industrial relations, social security and occupational safety marks a major milestone in India’s reform journey. These codes consolidate decades-old labour laws into a modern framework, simplifying compliance for firms while enhancing protections for workers. The new structure aims to facilitate job creation, encourage formalisation and improve workplace productivity, thereby supporting long-term economic growth and creating conditions more conducive to investment.
India’s external sector demonstrated resilience during April to October FY26 despite tariff-related challenges. Total exports of goods and services grew 4.8 per cent to 491.8 billion dollars, supported by a nearly 10 per cent rise in services exports. Merchandise exports rose modestly, although underlying momentum remained stronger in non-oil, non-gems and jewellery categories. The overall trade deficit stood at 78.2 billion dollars. While the steep US tariffs raise concerns for specific sectors, India’s relatively low exposure to global trade and the strength of domestic demand are likely to cushion the macroeconomic impact. Policy responses have been swift, ranging from easing agricultural export restrictions to rationalising tariffs and advancing bilateral trade negotiations, including the India–UK free trade agreement.
The outlook for the second half of FY26 remains favourable. The IMF recently reaffirmed that India’s growth is supported by sound macroeconomic management, stable inflation dynamics and ongoing structural reforms. Public capital expenditure remains strong, corporate balance sheets continue to improve, and services exports are expected to remain resilient.
With first-half growth already at 8 per cent and favourable conditions prevailing across sectors, India is poised to achieve GDP growth close to 7.5 per cent in FY26, reinforcing its status as the world’s fastest-growing major economy and strengthening its position as a key engine of global economic momentum.