Manufacturing muscle lifts Q2 GDP growth to 6-quarter high of 8.2%

FY26 estimates to be revised upwards after faster-than-expected expansion

Don't want to miss the best from Business Standard?

India’s economy expanded at its fastest pace in six quarters, growing 8.2 per cent during the July-September period of FY26, outstripping both official and private forecasts by a signifiant margin. 

Data released by the statistics ministry on Friday showed that while a low base and a soft deflator lifted headline gross domestic product (GDP) growth, the real standout was manufacturing. The sector grew 9.1 per cent in Q2, emerging as the main driver of growth despite concerns over the 50 per cent US tariff imposed on Indian goods during the quarter. Services sector also witnessed robust expansion at 9.2 per cent, while private consumption expenditure rose 7.9 per cent. 

Most economists had expected Q2 GDP expansion to fall within the 7-7.5 per cent range; the Reserve Bank of India (RBI) had projected 7 per cent. 

Nominal GDP rose at a slower 8.7 per cent in the September quarter, compared with the finance ministry’s full-year estimate of 10.1 per cent, due to lower retail and wholesale inflation. The gap between real and nominal growth is now the narrowest since the third quarter of FY20. 

Any shortfall in nominal GDP growth over the full year could complicate efforts to meet tax collection targets and may force the government to rein in spending to stick to the FY26 fiscal deficit target of 4.4 per cent of GDP. 

In the first half of FY26 (April-September), the economy grew by 8 per cent in real terms, following 7.8 per cent expansion in the first quarter. This performance has prompted economists to substantially revise their full-year growth forecasts upwards. 

Dharmakirti Joshi, chief economist at Crisil, said the third quarter is likely to benefit from some of the tailwinds seen in Q2. “The rationalisation of the goods and services tax (GST) rates is bolstering private consumption, complementing reduced income tax and interest rate cuts. While government investment will likely stabilise, there are hints of a belated uptick in private investments. Consequently, we have raised our forecast of India’s GDP growth for this financial year to 7 per cent, up from 6.5 per cent,” he said.

 

Prime Minister Narendra Modi called the Q2 numbers “very encouraging”. “It reflects the impact of our pro-growth policies and reforms. It also reflects the hard work and enterprise of our people. Our government will continue to advance reforms and strengthen Ease of Living for every citizen,” he posted on X. 

Union Finance Minister Nirmala Sitharaman said the GDP estimates show “robust economic growth and momentum”, adding that the government remains committed to reforms that support long-term expansion. “The growth has been driven by sustained fiscal consolidation, targeted public investment, and various reforms that have strengthened productivity and improved ease of doing business. Various high-frequency indicators also point to continued economic momentum and broad-based consumption growth,” she said. 

In the September quarter, the services sector grew 9.2 per cent, led by financial, real estate and professional services (10.2 per cent) and public administration, defence and other services (9.7 per cent). However, growth in trade, hotels, transport and communication, the largest services component, slowed sequentially to 7.4 per cent in Q2. 

Manufacturing recorded its strongest performance in six quarters at 9.1 per cent, while utility services, including electricity, gas and water supply, grew a robust 4.4 per cent, rebounding from 0.5 per cent in the June quarter. Agriculture expanded 3.5 per cent in Q2, slightly below the 3.7 per cent recorded in Q1. 

Net exports posed a larger drag in Q2 than in Q1, as overall exports (merchandise and services) rose only 5.6 per cent, despite front-loading of shipments to the US, while imports surged 12.8 per cent. 

On the expenditure side, private spending accelerated to a three-quarter high of 7.9 per cent, signalling stronger rural demand, while government spending contracted 2.7 per cent in the quarter. Investment demand, measured by gross fixed capital formation, rose a solid 7.3 per cent, though at a slightly slower pace than the 7.8 per cent seen in Q1FY26. 

Rajani Sinha, chief economist at CareEdge Ratings, said that despite the stronger-than-expected Q2 print, the RBI could still cut rates at the Monetary Policy Committee meeting next week. “The very low inflation currently would give the RBI the opportunity to cut rates as growth moderates in the second half of the year and trade-related uncertainties linger. The RBI will also consider that part of the high growth in H1FY26 is due to statistical factors,” she added.