Cautious optimism: On India and growth

India’s September-quarter GDP data for the current financial year beat all estimates, coming in at 8.2%, higher than 7.8% in Q1 FY26 and well above the year-ago period. This offers fleeting reassurance to policymakers, days after October’s trade data revealed a historic deficit of $41.68 billion, driven partly by a trebling of bullion imports — a signal of economic uncertainty. Growth has been led by manufacturing (9.1%) and services (9.2%), supported by a recovery in private consumption. Private Final Consumption Expenditure grew 7.9% in Q2 FY26, compared with 6.4% in Q2 FY25, while government spending also provided a modest boost. Together, these suggest a broad-based uptick in domestic activity despite global headwinds. Yet, the full effects of the external shock may surface in the quarters ahead. The U.S.’s ‘two-stage’ India tariffs, in August, landed mid-quarter. Some front-loading of export orders ahead of these tariffs may also have inflated Q2 output. A second statistical effect is at play. Retail inflation fell to 0.25% in October, the lowest in the current CPI series, contributing to a GDP deflator reportedly below 1%. A deflator this low mechanically inflates real GDP relative to nominal; the narrow gap between nominal GDP (8.7%) and real GDP (8.2%) underscores this. Should inflation rise or input costs firm up — if oil prices climb as India diversifies away from Russian crude — headline GDP growth may moderate. The RBI’s upcoming Monetary Policy Committee meeting adds uncertainty, as any policy rate will shape demand-side pressures.

The Gross Value Added breakdown shows construction growing 7.2%, and the services sub-segment of financial, real estate and professional services rising 10.2% — indicating that capital-intensive, infrastructure-linked sectors have been central to this momentum. Monthly industrial indicators reinforce this pattern: the IIP rose 4% in September, with core capital-intensive categories such as steel (14.1%) and cement (5.3%) recording strong gains. This aligns with the impact of the RBI’s three repo-rate cuts this year, which lowered the policy rate to 5.5% in June and may have supported investment activity. Crucially, the composition of growth remains skewed. The quarter’s expansion has been driven by capital-intensive and higher-skill sectors — banking and technology — while high-employment, labour-absorbing sectors continue to lag. IIP data for the past six months also point to weak rural consumption. There is, therefore, reason for cautious optimism. But the September-quarter growth spurt appears concentrated in better-paying formal sectors, even as low-income, export-linked, labour-intensive segments struggle. With September and October trade data already flashing warning signs, it might be too early to conclude that this pace of growth could be sustained.