India’s gross domestic product (GDP) is set to grow at 6.9% in the second half of the current financial year, slowing down from 8% in the first half, the National Statistics Office (NSO) indicated on Wednesday, as it projected economic expansion for the whole year at 7.4%, in line with independent consensus estimate. The economy had grown at 6.5% in FY25.
Economists called it resilient growth given the global headwinds including the Trump tariffs, but statistically favorable deflator effects played a significant role in lifting growth.
Among the sectors that are expected to slow down from H1 to H2 on annual terms are agriculture (3.9% to 2.7%), manufacturing (8.4% to 5.7%), and construction (7.4% to 6.7%). Among services, “financial, real estate etc.” and public administration are seen to record higher annual growth in H2, compared with H1.
The NSO in its first advance estimates (FAE) projected the nominal GDP in the current year to be Rs 357.14 lakh crore, marginally higher than Rs 356.97 lakh crore estimated in the Budget FY26. The growth in nominal GDP is seen at just 8%, marking one of the smallest differential with the real GDP expansion in several years. With H1 nominal GDP growth of 8.75%, the second half growth is implicitly estimated to be lower at 7.25%, one of the weakest in many years, barring the Covid-induced trough (FY21).
Though there could be pressure on the fiscal deficit to GDP ratio from lower than expected tax collections, the denominator will not be pain point. With higher non-tax revenues, and significant savings in revenue spending, no fiscal slippage is expected over the targetred 4.4% of the GDP.
Nominal Anchor: Narrowing Buffers for Fiscal Policy
However, subdued nominal GDP could lead to a weakening of tax buoyancy, requiring revenue estimates for the next financial year conservative, and the Budget size economical.
The February Budget had assumed a 10.1% growth in nominal GDP over revised estimates of FY25. However the base was revised 2% upwards in May.
“A real GDP growth of 7.4% reflects strong underlying momentum, led by investment and capex, but the low nominal GDP growth of 8% signals a sharp disinflationary phase. This narrows fiscal headroom as tax buoyancy weakens,” said Rajesh Shulka, noted statistician. The key policy challenge in FY26 will be to sustain fiscal consolidation without compromising on the investment cycle in a low nominal growth environment, he added.
H2 Moderation: Global Headwinds Meet Base Effects
What could come in handy for the budget managers is adoption of debt as the principal anchor of fiscal policy, which allows a greater degree of flexibility in deficit target for any year, insofar as it is on a declining path.
The Centre’s fiscal deficit widened to 62.3% of the annual target during April-November period, compared to 52.5% of the respective target a year ago, due to a surge in capital expenditure growth while the net tax revenues contracted by 3.4%.
On the expenditure side of the economy, NSO estimates private final consumption expenditure to grow at 7% a year in FY26, lower than 7.2% in FY26. Gross fixed capital formation, that mirrors investment activity, is estimated to grow 7.8% in FY26 compared with 7.1% in FY25.
The gross value added (GVA) that is a closer gauge of economic activity, as per the FAE, could be 7.3% in FY26 versus 6.4% in FY25. Among sectors, FAE for manufacturing growth is a robust 7% as against just 4.5% in FY25, while the construction sector is estimated to expand by 7% in the current fiscal, compared with 9.4% in FY25.
NR Bhanumurthy, director at Madras School of Economics said the NSO’s growth projections for H2 could turn out to be an under-estimation. “With good and les volatile monosson and based on other leading indicators, agriculture growth should be higher than last year’s, ” he said. On the private consumption side, with substantial lowering of GST rates, as well as a 125 basis points reduction in repo rate should have led to larger consumption growth than last year, not less, he said.
Rahul Agrawal, Senior Economist at ICRA also growth in the industrial and agricultural sectors to fare somewhat better than the NSO’s implicit estimates for H2, while services growth is likely to trail the same.
According to MC Singhi, an economist formerly associated with the government, the low GDP deflators or implicit inflation “may be a pressure of generation of tax resources.” While the centre may still meet its fiscal targets because of higher non-tax revenue, because of higher dependency, most states would feel fiscal stress, he warned. Singhi added that low inflation is also indicative of reduced pricing power of corporates and other producers. “This will affect capital formation and new investment. We may continue to see the investment GDP ratio to remain sticky,” he said.
Lower inflation also signals wages are not increasing. The lack of income effect, whether illusory or real, would dampen expectations and may moderate future consumption, said an economist on condition of anonymity. While lower inflation is usually good but a persistent sub par inflation erodes the optimism, the person added.
Vivek Kumar, economist at QuantEco, siad: “The sequential moderation in H2 growth reflects the impact of the adverse global environment, along with an anticipated pickup in inflation from extremely subdued levels in H1.”