ICRA Projects India's GDP Growth to Moderate to 7% in Q2 FY26 Amid Lower Government Spending

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AuthorAditi Singh|Published at:
ICRA Projects India's GDP Growth to Moderate to 7% in Q2 FY26 Amid Lower Government Spending
Overview

Rating agency ICRA forecasts India's GDP growth to slow to 7% in the July-September 2025 quarter (Q2 FY26) from 7.8% in the April-June period. This moderation is attributed to reduced government spending. However, strong performance in manufacturing, construction, and favorable base effects, along with inventory stocking for festivals and upfronting of exports, are expected to support overall economic activity, even as services and agriculture may see a slight slowdown.

Rating agency ICRA has projected that India's Gross Domestic Product (GDP) growth will moderate to 7 per cent during the July-September period of the fiscal year 2026 (Q2 FY26). This marks a slowdown from the estimated 7.8 per cent growth recorded in the preceding quarter (Q1 FY26). The primary reason cited for this expected moderation is a projected lower year-on-year rise in government spending.

While the services and agriculture sectors are anticipated to experience a slight loss of momentum in the second quarter, the industrial sector is expected to exhibit strong performance. This industrial strength will be driven by the manufacturing and construction segments, further bolstered by favorable base effects from the previous year. These factors are expected to underpin the overall economic activity for the quarter.

ICRA chief economist Aditi Nayar noted that a dip in government expenditure growth is likely to influence the pace of GDP and GVA (Gross Value Added) growth in Q2 FY2026 compared to Q1 FY2026. However, several factors are expected to counter this slowdown. These include inventory stocking activities in anticipation of the early onset of the festive season, a potential volume pick-up induced by Goods and Services Tax (GST) rationalisation, and an acceleration of exports to the United States ahead of anticipated tariffs. These elements are projected to significantly boost the manufacturing sector and enable industry GVA growth to surpass that of the services sector, a reversal after a gap of four quarters.

The National Statistics Office (NSO) is scheduled to release the official GDP growth estimates for FY26 Q2 on November 28.

Impact
This news impacts the Indian stock market by providing insights into the near-term economic outlook. A projected slowdown, even if moderate, can influence investor sentiment and potentially lead to cautious market behaviour, especially if it deviates significantly from expectations. Conversely, the strong performance anticipated in manufacturing and industry could support specific sector stocks. The overall GDP growth rate is a key determinant of corporate earnings and future investment, thus affecting market returns.
Impact Rating: 7/10

Terms

  • GDP (Gross Domestic Product): The total monetary value of all the finished goods and services produced within a country's borders in a specific time period. It's a broad measure of a nation's overall economic activity.
  • GVA (Gross Value Added): A measure of the value added at each stage of production of goods and services. It is calculated by subtracting intermediate consumption from the output. GDP is calculated by adding indirect taxes and subtracting subsidies to GVA.
  • YoY (Year-on-Year): A comparison of a company's or economy's performance over a period against the performance in the same period of the previous year.
  • Base Effects: Occur when the comparison of two periods is affected by the performance of the earlier period. For example, if economic growth was very low in a specific quarter last year, growth in the same quarter this year might appear high even if the absolute increase is modest.
  • GST (Goods and Services Tax): A comprehensive indirect tax levied on the supply of goods and services, applicable from manufacturing to end-consumer. GST rationalisation refers to changes or improvements made to the tax structure to simplify it or make it more efficient.
  • Tariffs: Taxes imposed by a government on imported goods, often aimed at protecting domestic industries or raising revenue.
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