India’s economy is projected to grow at 6.7% in the first quarter (Q1) of FY2026, according to rating agency ICRA, surpassing the Reserve Bank of India’s (RBI) forecast of 6.5%. While the growth marks a moderation from the 7.4% expansion in Q4 FY2025, it remains robust, largely buoyed by strong services performance and heightened government capital spending.
Sector-Wise Breakdown: Services Lead, Industry Slows
Gross Value Added (GVA)
- ICRA estimates GVA growth at 6.4% in Q1 FY2026, down from 6.8% in Q4 FY2025. This slowdown is driven by:
- Industrial Growth: Expected to decelerate to 4.0%, down from 6.5% in the previous quarter.
- Agriculture, Forestry & Fishing: Forecast to ease to 4.5% from 5.4%, despite healthy crop output in the 2024–25 agricultural year.
- Services Sector: Estimated to accelerate to an eight-quarter high of 8.3%, compared to 7.3% in Q4 FY2025, propelled by rising government expenditure.
Role of Indirect Taxes and Subsidy Trends
ICRA notes a double-digit nominal growth in net indirect taxes, although lower than the previous quarter’s 22.7%. Key highlights,
- Indirect tax revenue increased by 11.3% in Q1 FY2026, compared to a contraction of 3.1% in Q4 FY2025.
- Subsidy outgo contracted by 7.3%, a slower pace compared to 40.7% in the previous quarter.
- This kept the gap between GDP and GVA positive at 30 basis points, though narrower than the 62 basis points in Q4.
Government Expenditure: Key Growth Catalyst
Central Government Spending
Based on CGA data,
- Capital expenditure rose by 52.0% YoY, reaching ₹2.8 trillion in Q1 FY2026.
- This is a substantial increase over 33.4% growth in Q4 FY2025 and a turnaround from a 35% contraction in Q1 FY2025.
- State Government Spending
Across 24 states
- Aggregate capital outlay and net lending rose 23.0% YoY to ₹1.1 trillion.
- Continued from a 27.0% rise in Q4 FY2025 and rebounding from a 19.6% decline in Q1 FY2025.
Revenue Expenditure
- Combined non-interest revenue expenditure of states grew by 10.7% in Q1 FY2026.
- The Centre’s non-interest revenue expenditure also rebounded, rising by 6.9%, reversing the 6.1% contraction in Q4.
Private Sector Activity: Project Announcements Surge
- India’s investment outlook remains strong:
- New project announcements nearly doubled to ₹5.8 trillion, compared to ₹3.0 trillion in Q1 FY2025.
- Project completions reached ₹2.3 trillion—well above ₹0.7 trillion last year, though slightly down from ₹2.5 trillion in Q4 FY2025.
Outlook and Forward Signals
ICRA suggests that economic momentum may remain steady, supported by,
- Government spending and infrastructure push.
- Potential monetary easing transmission, improving liquidity and credit flows.
- Upcoming GST rationalisation likely to enhance urban consumption sentiments ahead of the festive season.
- Despite slower growth in agriculture and industry, the resilient services sector and policy-driven expenditure are expected to keep India’s growth on a stable path.