Govt spending and exports likely to begin unwinding in Q2, says BMI

After a better-than-expected 7.8 per cent growth in the first quarter of financial year 2026 (Q1FY26), the front‐loaded government spending and exports are likely to begin to unwind significantly in the second quarter, BMI, a Fitch Solutions company, said in its India Outlook report published Monday. 

“Government spending will face new constraints. We estimate that the proposed goods and services tax (GST) reform will reduce fiscal revenue by 0.2 per cent of GDP, with only a minuscule offset from any resulting boost to private consumption. Low nominal growth in Q2FY25 will also weigh on revenue,” BMI said, adding that the private sector will offset weaker government spending, especially in fixed investment, in the coming quarters, given the challenging economic outlook. 

“Consequently, government consumption, fixed investment and exports will grow more slowly over the rest of FY25/26,” it added. 

BMI said any export front‐loading that continued post-June has likely been cut short by the rise in US ‘reciprocal’ tariffs, first to 25 per cent on July 31 2025 and then to 50 per cent on August 27 2025.

 

The agency maintained its GDP growth forecast of 5.8 per cent for FY26, but highlighted chances of upward revision.

 

“The strong Q2 (June quarter) 2025 results pose upside risks to our FY25/26 growth forecast,” it said, noting that growth would only need to slow to 5.2 per cent on average over the next three quarters to meet that estimate.

 

“An upward revision over the coming weeks is more likely than not, and much will depend on the extent of the slowdown following what appears to have been a heavily front-loaded quarter,” the report said.

 

The report added that weaker government spending, investment and exports are expected through the rest of the financial year.

 

Still, subdued inflation, seen at around 3 per cent by March 2026, and a boost to household spending from GST changes could provide support. However, BMI cautioned that these gains are likely to be offset by a rise in unemployment in the coming months as US tariffs weigh on economic activity.