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%)
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