India's economic landscape is painting a picture of cautious optimism, but is it the whole story? The September quarter's GDP data for the current financial year delivered a pleasant surprise, clocking in at an impressive 8.2%. This figure outshone all expectations, surpassing the 7.8% recorded in the first quarter of FY26 and significantly exceeding the performance from the previous year. This news offers a moment of relief for policymakers.
However, just days after this positive news, October's trade data revealed a record-breaking deficit of $41.68 billion. This was partly fueled by a threefold increase in bullion imports, which could signal economic uncertainty.
The growth surge was primarily driven by the manufacturing sector (9.1%) and services sector (9.2%), both boosted by a resurgence in private consumption. Private Final Consumption Expenditure experienced a 7.9% growth in Q2 FY26, compared to 6.4% in Q2 FY25. Government spending also provided a modest boost. Together, these factors indicate a widespread increase in domestic activity, despite global economic challenges.
But here's where it gets controversial... The full impact of external shocks might not be visible yet. The U.S.'s 'two-stage' India tariffs, introduced in August, landed mid-quarter. Some businesses might have front-loaded export orders before these tariffs took effect, potentially inflating the Q2 output figures.
Another factor at play is the statistical effect of inflation. Retail inflation dropped to 0.25% in October, the lowest in the current CPI series, contributing to a GDP deflator reportedly below 1%. A low deflator artificially inflates real GDP relative to nominal GDP. The narrow gap between nominal GDP (8.7%) and real GDP (8.2%) highlights this.
What if inflation rises? Or, what if input costs increase, perhaps due to rising oil prices as India diversifies away from Russian crude? Headline GDP growth could moderate. The upcoming Monetary Policy Committee meeting of the RBI adds further uncertainty, as any policy rate adjustments will influence demand-side pressures.
The Gross Value Added breakdown reveals construction growing at 7.2%, and the services sub-segment of financial, real estate, and professional services rising by 10.2%. This suggests that capital-intensive, infrastructure-linked sectors are key drivers of this momentum. Monthly industrial indicators support this pattern, with the IIP rising by 4% in September. Core capital-intensive categories like steel (14.1%) and cement (5.3%) showed strong gains. This aligns with the impact of the RBI's three repo-rate cuts this year, which lowered the policy rate to 5.5% in June and may have supported investment activity.
And this is the part most people miss... The composition of growth is still skewed. The quarter's expansion has been driven by capital-intensive and higher-skill sectors like banking and technology, while high-employment, labor-absorbing sectors continue to lag. IIP data for the past six months also indicates weak rural consumption.
Therefore, while there's reason for cautious optimism, the September-quarter growth seems concentrated in better-paying formal sectors. Low-income, export-linked, and labor-intensive segments are struggling. With warning signs already flashing in the September and October trade data, it might be premature to assume this growth rate is sustainable.
What do you think? Do you believe the current growth is sustainable, or are there underlying issues that need addressing? Share your thoughts in the comments below!
