India’s GDP Growth Likely Slowed to 7% in Q2 FY26

India’s economy is projected to have slowed to 7% growth in Q2 FY26, from 7.8% in Q1, as per the latest forecast by ICRA Ratings, citing a weaker performance in the services and farm sectors. The moderation in government expenditure and subdued services exports also contributed to the slowdown, despite a resilient industrial sector.

Sector-Wise Performance: Services and Agriculture Drag, Industry Leads

ICRA’s Chief Economist Aditi Nayar highlighted that the Gross Value Added (GVA) growth is likely to have declined to 7.1% in Q2 from 7.6% in Q1.

Services Sector

• Services GVA is estimated to drop to 7.4% in Q2 from an eight-quarter high of 9.3% in Q1.
• Decline attributed to lower government spending and a slowdown in services exports, which eased to $101.6 billion (8.7%) from $97.4 billion (10.1%) in Q1.

Agriculture Sector

• Agriculture GVA likely moderated to 3.5% in Q2, down from 3.7% in Q1, and far below 4.1% in Q2 FY25.
• Although kharif sowing increased, floods and unseasonal rain in August–October hurt crop yields and harvesting.

Industrial Sector

• Industry GVA is expected to have risen to 7.8%, a five-quarter high, up from 6.3% in Q1.
• Boosted by inventory stocking, early festive demand, GST rate cuts, and pre-tariff export rush to the US.

Government Spending and Revenue Trends

ICRA warned that lower government spending could continue to weigh on GDP growth,

• Government gross capex moderated to 30.7% in Q2 from 52% in Q1, though absolute monthly spending rose to ₹1.01 lakh crore from ₹91,700 crore.
• Centre’s non-interest revenue expenditure contracted by 11.2% in Q2 compared to a 6.9% increase in Q1.
• State capex based on 22 states fell 4.6% in Q2 from a 23% jump in Q1, due to base effect.

Net Indirect Taxes and GDP-GVA Gap

The report also notes a shift in net indirect taxes, which,

• Contracted by 5.2% in Q2, compared to 11.3% growth in Q1, largely due to shallower subsidies and revenue moderation.
• As a result, the GDP-GVA gap reversed, moving from a positive 18 basis points (bps) in Q1 to negative 10 bps in Q2.

Outlook for H2 FY26: Below 7% Growth Likely

Nayar cautioned that unless the government increases capital expenditure and tariff-related uncertainties reduce, GDP growth may dip below 7% in H2. While GST rate cuts may improve demand for non-durables, consumer durables may trend toward premiumisation, reducing overall volume boosts.

Key Static Facts: Q2 FY26 Economic Outlook

• ICRA Q2 GDP Growth Estimate: 7% (vs 7.8% in Q1 FY26)
• Services GVA: 7.4% (Q2) vs 9.3% (Q1)
• Agriculture GVA: 3.5% (Q2) vs 3.7% (Q1)
• Industry GVA: 7.8% (Q2) vs 6.3% (Q1)
• Services Exports: $101.6 billion (8.7% growth) vs $97.4 billion (10.1%)