Beating expectations: Recent reforms will improve the business environment

India's GDP surged 8% in the first half, defying global headwinds, but weak nominal growth and slowing tax revenues raise fresh questions ahead of the MPC's policy review

The Indian economy grew at a much faster pace than expected in the first half this financial year. The data released last week showed that gross domestic product (GDP) expanded by 8.2 per cent at constant prices in the second quarter, taking first-half growth to 8 per cent, up from 6.1 per cent last year. The Reserve Bank of India (RBI) had projected a growth rate of 7 per cent for the second quarter. Growth was supported by increased activity in segments such as manufacturing, which grew 9.1 per cent, and construction, which went up 7.2 per cent. The tertiary sector also recorded a growth rate of over 9 per cent. On the expenditure side, private consumption strengthened and grew 7.9 per cent, while growth in investment slowed a bit to 7.3 per cent compared to 7.8 per cent in the first quarter. 

The Indian economy’s performance, based on the available numbers, has been exceptional in the first half of 2025-26. It is worth emphasising that the external environment was not supportive. The United States’ (US’) trade policy has significantly increased uncertainty in the global economy. The US has also imposed a 50 per cent tariff on India, the impact of which is now beginning to show. Most economists, therefore, expect growth to soften a bit in the second half. However, on the positive side, the government is hopeful of arriving at a trade deal with the US soon. A bilateral investment treaty is also being negotiated, which should help improve investment over the medium term. On the domestic front, the impact of rationalisation and the reduction in goods and services tax rates, which became effective in late September, should be visible in the December-quarter numbers. Considering all factors, economists expect full-year growth could well exceed 7 per cent, which would be very encouraging, given the current global economic backdrop. Measures such as the notification of the four labour Codes by the government and the consolidation of over 9,000 circulars and directions by the RBI last week will also help improve ease of doing business. 

Although the growth numbers are impressive in real terms, the level of nominal growth has raised some concern. In nominal terms, the economy expanded 8.8 per cent in the first half. In the second quarter, for example, the difference between the nominal and real growth rates was just 50 basis points, which can be explained by low inflation. However, corporate earnings and tax revenue depend on nominal expansion, which can have varied implications for the economy. Tax collection, for example, in April-October grew only 4 per cent, though there was a sharp uptick in October. To meet the full-year gross tax-revenue target, collection will need to clock a growth rate of over 20 per cent in November-March, which could be difficult to achieve. 

From a medium-term perspective, since the government is moving to target the debt-to-GDP ratio, sustained low nominal growth could make things difficult. Notably, a lot will also depend on the much-awaited GDP base revision next year. However, the most immediate policy question is what the latest GDP numbers mean for the Monetary Policy Committee, which is scheduled to meet this week. As noted in this space recently, the MPC’s decision will depend on how the recent inflation outcomes have shaped its projections for the coming quarters. At the current pace of growth, a 25-basis-point rate cut is unlikely to make a significant difference.