India GDP Q2 Report: 8.2% Growth, sector-wise data & outlook

Strong Q2 Performance and Growth Momentum

India’s economy recorded strong momentum in the second quarter of FY 2025-26, with real GDP expanding by 8.2%, the fastest pace in six quarters. This performance was significantly above earlier estimates and is expected to lift the full-year growth rate to above 7%, reinforcing India’s position as the fastest-growing major economy. The robust data arrived despite external pressures, particularly the 50% tariffs imposed by the United States in late August, creating uncertainty for export prospects in the coming quarters. The overall growth momentum has largely been driven by domestic consumption and investment, which continue to act as key pillars of the economy.

Expenditure-Side Growth: Consumption and Investment Lead

During the second quarter, nominal GDP grew by 8.7%, while real private final consumption expenditure increased by 7.9%, higher than the 6.4% growth recorded in the same period a year earlier. Gross fixed capital formation, reflecting investment activity, grew by 7.3%, supported by frontloaded government capital expenditure. In contrast, the contribution of net exports to GDP growth remained negative, with a drag of –2.1 percentage points compared to –1.4 percentage points in the previous quarter. For the first half of the financial year, real GDP growth stood at 8.0%, compared with 6.1% in the first half of the previous year.

Sector-Wise Performance: Industry and Services Drive Growth

On the sectoral front, the secondary and tertiary sectors were the key contributors to growth. Manufacturing expanded by 9.1%, marking a multi-quarter high, while the construction sector grew by 7.2%. In the services segment, financial, real estate and professional services witnessed sustained momentum, registering 10.2% growth. Public administration and defence-related services also performed strongly at 9.7%. Agriculture and allied activities, however, experienced moderate growth of 3.5%, while utilities such as electricity, gas and water supply grew by 4.4%. The sectoral spread of growth indicates that both industry and services played a significant role in driving economic expansion.

Narrowing Gap Between Real and Nominal GDP

A notable macroeconomic trend has been the narrowing gap between nominal and real GDP growth. Typically, nominal GDP grows much faster than real GDP due to inflation. However, nominal GDP grew only marginally faster at 8.7% compared to real growth of 8.2%. This was primarily driven by exceptionally low inflation. The GDP deflator for the first half of the year was only 0.8%, reflecting low CPI inflation of 2.2% and nearly flat wholesale price inflation of 0.1%. While this benefits consumers through stable prices, it also raises fiscal challenges because tax revenues are dependent on nominal GDP growth.

Fiscal Implications of Low Nominal Growth

Tax revenue data for the first half of the fiscal year showed growth of only 2.8%, resulting in tax buoyancy of 0.32—well below the budgeted estimate of 1.1. Achieving the annual target of 12.5% growth in gross tax revenues would require an increase of over 22% in the remaining months. Lower nominal GDP growth also puts pressure on the fiscal deficit and debt-to-GDP ratios. However, higher-than-expected non-tax revenues may partially offset the slowdown in tax collections and help maintain fiscal stability.

Trade Challenges and Export Resilience

Despite challenges in the external sector, exports showed resilience due to early shipment activity ahead of the US tariffs. The rupee depreciated by around 3.5% against the dollar, improving export competitiveness. However, if the high US tariffs persist, export performance may weaken in the coming quarters. Diversifying export destinations beyond the United States is seen as crucial to mitigating the risk. Economists expect net exports to continue exerting a negative contribution unless global trade conditions improve.

Outlook: Growth Expected to Stay Above 7%

Looking ahead, forecasts indicate that full-year GDP growth may exceed 7%, above the current estimates of 6.8% by the RBI and 6.6% by the IMF. Manufacturing activity and private consumption are expected to remain the major growth drivers. Favourable inflation trends, income tax relief, GST rate adjustments and strong urban demand are likely to support momentum. Rural demand could improve with adequate rainfall and stable agricultural incomes. Although government capital expenditure may moderate in the second half, private consumption is projected to remain supportive.

Risks and Long-Term Considerations

External risks such as global demand shifts, trade policy changes and geopolitical uncertainties remain important variables in the economic outlook. Yet, India has shown resilience, with domestic demand, industrial performance and services growth acting as stabilizers. As the country moves closer to becoming the world’s third-largest economy in nominal terms, sustaining broad-based growth and managing external headwinds will be crucial to maintaining its current trajectory.