Consumption demand zooms to 3-quarter high; govt spending declines in Q2

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

In what could be a sign of recovery in consumption demand, growth in private final consumption expenditure (PFCE) — which represents demand in the economy — rose to a three-quarter high of 7.9 per cent during July–September (Q2 FY26) from 7 per cent during Q1 FY26.

 

Economists reckon this recovery could be a sign of the broadbasing of consumption in the economy, with rural consumption leading the way.

 

The latest data released by the National Statistics Office (NSO) on Friday also showed the share of PFCE in nominal gross domestic product (GDP) rose to 62.5 per cent in Q2 FY26 from 60.3 per cent in Q1 FY26.

 

Devendra Kumar Pant, chief economist, India Ratings, says that the strong agriculture growth and decline in inflation is getting reflected in strong rural consumption growth and has brightened the scope of strong consumption growth in H2 FY26 as well and is expected to continue at least in H1 FY27.

 

Echoing similar views, IDFC Bank chief economist Gaura Sengupta said that despite the full impact of goods and services tax (GST) cuts not materialising in Q2, rural consumption has picked up, as indicated by high-frequency indicators like sales of two-wheelers and tractor sales.

 

“Though high-frequency indicators in urban areas like passenger vehicles, sales of electronic goods and FMCG have seen a slowdown — high wage growth in corporate India during Q2 has kept consumption broad based. Moreover, the effect of GST cuts is materialising in Q3, which will keep demand kicking in subsequent quarters,” she added.

 

However, government spending, as represented by government final consumption expenditure (GFCE), declined 2.7 per cent during the quarter from 7.4 per cent in the preceding quarter. As a share in nominal GDP, it fell to 9.1 per cent from 10.1 per cent in Q1 FY26.

 

ICRA chief economist Aditi Nayar said that GFCE “expectedly” contracted, led by weak government revenue spending, especially for the states.

 

“Centre’s non-interest revenue expenditure contracted by a sharp 11.2 per cent in Q2, as against the 6.9 per cent uptick seen in Q1. The growth in the combined non-interest revenue expenditure of 22 state governments halved to 5.3 per cent from 10.9 per cent during the same time period. This suggests that the other services, which include segments like health, education, recreation and other personal services, are likely to have outperformed in the quarter,” she added.

 

The data also showed that gross fixed capital formation (GFCF), which is taken as a proxy for investment demand in the economy, however, slowed to 7.3 per cent in Q2 FY26 from 7.8 per cent in Q1 FY26.

 

As a share in nominal GDP, it rose marginally to 30.5 per cent in Q2 FY26 from 30.4 per cent in the preceding quarter.