India's GDP Growth Projected to Moderate to 7% in Q2 FY26 Despite Strong Industrial Performance

India's economic growth is forecast to reach a strong 7 per cent in Q2 FY26, down from 7.8 per cent in Q1 FY26, according to a report released Monday.

The gross value added (GVA) growth is expected to see a smaller decline to 7.1 per cent from the previous quarter's 7.6 per cent.

ICRA's report indicates that reduced expansion in the services sector—dropping to 7.4 per cent from 9.3 per cent—and agriculture—decreasing to 3.5 per cent from 3.7 per cent—will likely offset the industrial sector's improvement to a five-quarter high of 7.8 per cent from 6.3 per cent.

The report predicts that net indirect taxes in nominal terms will contract year-on-year during the quarter under review, following a 9.5 per cent rise in Q1 FY26. This is attributed to indirect taxes declining by 5.2 per cent compared to an 11.3 per cent increase in Q1, alongside a smaller contraction in subsidies at -4.6 per cent versus -7.3 per cent previously.

Consequently, the gap between GDP and GVA growth is expected to return to negative territory at 10 basis points in Q2 FY2026, after being positive (18 basis points) in the preceding quarter.

Aditi Nayar, Chief Economist and Head of Research and Outreach at ICRA, stated, "A lower year-on-year rise in Government spending is likely to weigh on the pace of GDP and GVA growth in Q2 FY2026 compared to Q1 FY2026."

She added, "However, inventory stocking related to the early onset of the festive season, enhanced by GST-rationalisation induced volume pickup, and upfronting of exports to the US ahead of tariffs, are expected to boost manufacturing sector performance, helping industry GVA growth outpace services after four quarters."

On an enlarged base, gross capital expenditure growth moderated to 30.7 per cent in Q2 FY2026 (from 10.3 per cent in Q2 FY2025), down from 52.0 per cent in Q1 FY2026 (which had seen -35.0 per cent in Q1 FY2025).

In absolute terms, the monthly average capital expenditure increased to Rs. 1,019 billion in Q2 from Rs. 917 billion in Q1, according to the report.

The average monthly capital expenditure rose to Rs 544 billion in Q2 FY2026 from Rs 378 billion in Q1 FY2026, representing approximately half of the government's level.