India's economy demonstrated remarkable resilience by expanding at a robust 8.2% during the second quarter of the current financial year, significantly outperforming the Reserve Bank of India's projection of 7% growth. This stronger-than-expected performance has increased the likelihood of the economy achieving over 7% growth for the full fiscal year.
Sectoral Performance and Economic Drivers
The disaggregated data reveals broad-based growth across key sectors. Agriculture recorded a healthy 3.5% growth, with expectations of continued strength in the second half due to the positive impact of a good monsoon. The manufacturing sector showed particularly strong momentum, expanding at 9.1% - notably higher than the sub-5% average reflected in the Index of Industrial Production.
Services sector performance remained robust, primarily driven by financial, real estate, and professional services. Corporate health appears strong, with a Bank of Baroda study indicating that while net sales of 1,221 companies grew by 6.3%, their net profits surged by an impressive 15.5%.
Monetary Policy Implications and External Factors
The Monetary Policy Committee is scheduled to meet shortly amid favorable conditions for potential rate cuts. Inflation has remained consistently below the RBI's target for several months, creating room for monetary easing. However, the committee must weigh this against the current healthy growth momentum.
Recent economic developments add complexity to the decision. The full effects of GST rate cuts implemented from September 22 will become apparent in the third quarter. Early signs of strengthened private consumption are emerging, with October data from the Federation of Automobile Dealers Associations showing surging sales of passenger vehicles and two-wheelers.
Conversely, merchandise exports to the US declined by 9% in October, reflecting the impact of tariffs imposed by the Trump administration. This external headwind, combined with concerns about government consumption expenditure - which acted as a drag on growth with the Centre's non-interest non-subsidy revenue expenditure declining by 6.4% during April-October - presents challenges.
Fiscal Considerations and Future Outlook
Nominal GDP grew at approximately 8.8% in the first half of the year, falling short of the 10.1% assumption in the Union Budget 2025-26. This lower-than-budgeted nominal growth could have implications for tax collections, debt levels, and deficit ratios.
With inflation well under control, the MPC's assessment of growth sustainability will be the determining factor in whether it opts for rate cuts. The economy's performance in the coming months will be shaped by the interplay between domestic policy measures like GST reforms and external factors including global trade tensions.
