India's 7.4% GDP growth looks solid but faces a narrower margin for error

The first advance estimates (FAEs) of gross domestic product (GDP) for this financial year, released on Wednesday by the National Statistics Office (NSO), show that the Indian economy in real terms is projected to grow 7.4 per cent in 2025-26, broadly in line with market expectations. The Reserve Bank of India had projected a growth rate of 7.3 per cent for the current year. Since the economy grew 8 per cent in the first half of the year, growth is expected to be lower in the second half. Nevertheless, the projected growth of 7.4 per cent is impressive, given the odds, and is significantly higher than last year’s 6.5 per cent. The high real growth is partly driven by low inflation. Nominal growth for the year is projected at 8 per cent. Nominal growth in FAEs attracts significant interest because it forms the basis for Budget calculations. 

In absolute terms at current prices, the economy is projected to attain the size of ₹357.14 trillion, which is marginally higher than the level assumed in the 2025-26 Budget. Thus, there is no surprise here. However, containing the fiscal deficit at 4.4 per cent of GDP may still be challenging owing to tepid revenue growth. Since the government is slated to adopt debt-to-GDP as the fiscal anchor from next financial year, nominal growth will now attract more interest. The inflation rate is expected to move up in the coming quarters from its current lows, which should help improve nominal growth. In fact, it is worth highlighting that the NSO will release a new GDP series next month with a revised base. Reportedly, it will address some of the concerns raised by economists and analysts over the years about the current series. The statistics department will also release a new series for the consumer price index. Thus, overall, there could be significant changes in the way economic activity and prices are gauged in India. 

However, irrespective of the change in the base year and the methodology used to measure GDP, it is not difficult to argue that next financial year could be more challenging. How the government intends to approach the year ahead will become clear in the Budget, due in a few weeks. The challenges are largely emanating from the external front. Despite months of negotiations, a trade deal with the United States (US) remains uncertain. Much will depend on how quickly a mutually beneficial agreement is reached. India is also hoping for an early closure of a free-trade agreement with the European Union. These two deals are extremely important. If the trade deal with the US is delayed, challenges could emerge on the balance of payments front, which is getting reflected in the pressure on the rupee. If India is at a significant disadvantage in exporting to the US, it could also affect foreign investment, both direct and portfolio. Foreign portfolio investors, for instance, sold Indian stocks worth over $18 billion in 2025. 

One of the factors driving growth in recent years has been high capital expenditure by the government. While it is believed that moving to the debt anchor will give more flexibility in terms of the size of the deficit, it remains to be seen whether the level and growth in capital expenditure can be sustained. Further, on the domestic front, there are renewed signs of a reform push. More efforts will be needed to maintain the growth momentum next financial year.