India's economy delivered an impressive performance in the second quarter of the 2025-26 fiscal year, recording 8.2% GDP growth that exceeded economic forecasts. This robust expansion has lifted the first half's growth rate to 8%, prompting economists to revise their full-year projections upward to approximately 7.5%.
The Manufacturing Surprise and Data Questions
The standout driver of this growth was the manufacturing sector, which surged by 9.1% during July-September 2025. However, this remarkable performance appears somewhat inconsistent with other economic indicators. The index of industrial production averaged below 4% during the same period, while core sector growth registered just 2.9% cumulative expansion from April to September.
Adding to the complexity, the International Monetary Fund has recently expressed reservations about India's income accounting quality, assigning the country a 'C' rating in its data adequacy assessment. These discrepancies highlight the importance of examining multiple data points when evaluating economic performance.
Consumption Strength and Inflation Dynamics
Private consumption expenditure showed significant strength, growing at 7.9% in real terms during the second quarter (9.3% in current prices). This consumption boost comes despite somewhat anemic corporate earnings in the consumer goods sector, creating an interesting economic puzzle.
The gap between nominal and real GDP growth reveals important inflation dynamics. The second quarter's real GDP expansion of 8.2% was only half a percentage point lower than the nominal rate of 8.7%. For the first half overall, the nominal growth rate of 8.8% translated to 8% in real terms.
This inflation scenario presents fiscal challenges. The government's budget had assumed nominal GDP growth of 10.1%, which now appears optimistic. Unless inflation accelerates significantly in the second half, tax collections may fall short of projections, potentially requiring spending adjustments to maintain the fiscal deficit target of 4.4% of GDP.
The Investment Imperative for Sustained Growth
While current consumption trends provide short-term momentum, the fundamental question remains: Can India sustain 8% plus growth for years to come? The answer hinges critically on investment levels, particularly fixed capital formation.
Currently, fixed capital formation appears stuck at around 30.5% of GDP. Economic experts suggest this ratio needs to increase by at least five percentage points to support sustained high growth. As the government plans to shift focus toward reducing its debt burden from 2026-27 onward, public investment capacity will be constrained, placing greater responsibility on private investment.
The recent GST rate reductions implemented on September 22, 2025, may provide a consumption stimulus that encourages businesses to expand capacity. However, the full impact of these measures won't be clear until early 2026 data becomes available.
Infrastructure development emerges as a promising avenue for attracting private capital. The government's promised policy on public-private partnerships (PPPs) could play a crucial role, though past controversies surrounding such projects highlight the need for enhanced transparency and robust frameworks.
Export recovery could provide additional growth momentum, but ultimately, sustained high growth requires significant capacity expansion across the economy. The current growth spurt provides encouraging momentum, but transforming this into long-term trajectory demands strategic focus on investment climate and infrastructure development.
