Under the revised GDP series, the Indian economy is now estimated to grow at 7.6% in the current year, marginally higher than the earlier projection of 7.4%. That is an impressive number, but it must be viewed against the sharp downward revision in FY24 growth from 9.2% to 7.2%. The lower base has mechanically lifted FY25 growth to 7.1% from 6.5% earlier and is also helping underpin the 7.6% estimate for FY26.
Even so, three consecutive years of 7%-plus growth—in both GDP and gross value added terms—is commendable, particularly given a challenging global backdrop. Export headwinds, especially the uncertainty surrounding the India-US trade deal, have weighed on momentum. Importantly, the revised GDP series incorporates new segments of the economy and adopts the double-deflator method for manufacturing, enhancing the credibility and granularity of the data. When sectors transform, new business models emerge and price dynamics shift, outdated measurement frameworks risk distorting the picture. That, in essence, is why the new GDP series became necessary.
Base Effect Factor
On the demand side, investment is showing encouraging signs. Gross fixed capital formation is expected to rise by about 7.1% this year. Manufacturing, according to the second advance estimates, is projected to grow a robust 11.5%. The services sector remains resilient, with the employment-intensive trade, hotels, and transport segment expanding at a healthy 10%. Private final consumption expenditure (PFCE) is projected to grow 7.7%, which appears strong at first glance.
However, this comes off a relatively weak base of 5.8% growth in each of the previous two years. It was precisely this sluggish consumption that prompted the government to deliver a fiscal impulse through income tax and goods and services tax rate cuts. The 8.7% year-on-year (y-o-y) jump in PFCE in the December 2025 quarter suggests that these measures have begun to gain traction.
Consumption Crossroads
The durability of consumption, however, remains uncertain. Rural spending growth moderated to 5.3% y-o-y in Q3FY26 from 7.9% in the preceding quarter. The agricultural sector is projected to grow just 2.4% this year, with Q3 growth slowing to 1.4%—the weakest in eight quarters. While real wages have risen, government allocations towards rural schemes have been modest. With the added risk of potential job losses in the information technology sector over the next couple of years, consumption growth may face headwinds.
Equally concerning is the moderation in construction activity over the past two years. Construction is a key job creator, and its slowdown mirrors the cooling of the real estate market, particularly in the mid- and lower-priced segments. Economists expect household investment in new homes to remain subdued in the near term, which could dampen employment and ancillary demand.
The data revisions also marginally reduce the estimated size of the economy to about `345 lakh crore in FY26. This recalibration will nudge fiscal deficit and debt ratios slightly higher, though they remain manageable. The government’s targeted real GDP growth of 7.2-7.4% and nominal growth of 11% for FY27 appear achievable, especially if the India-US trade agreement materialises soon.
However, growth in the 7% range may not be sufficient to significantly lift capacity utilisation or spur a broad-based private investment cycle. For that, the economy likely needs to move closer to 8% on a sustained basis. The current trajectory is solid, but to unlock a stronger capex push and more durable employment gains, the next gear shift will be essential.