A report by the Union Bank of India suggests that India's economy likely grew at a robust pace of 7.5% in the second quarter of the current fiscal year (Q2 FY26, July-September), marking a significant acceleration from the 5.6% recorded in the same period last year (Q2 FY25). This strong growth forecast is notable as it appears to have successfully navigated the headwinds caused by the steep US tariffs imposed on Indian goods.
Key Drivers and Resilience Factors
The report highlights several factors that contributed to the resilience and growth momentum, even with external pressures:
- Favourable Base Effect: A lower growth number in the year-ago period (Q2 FY25) provided a statistical boost to the current quarter's year-on-year growth rate.
- Front-Loading of Exports: Indian companies accelerated their export shipments ahead of the US tariff deadline (late August), which partially cushioned the immediate impact of the duties during the quarter.
- Strong Government Spending: Continued, high levels of government capital expenditure provided a critical support base for overall economic expansion.
- Robust Private Sector Activity: The report notes that Gross Value Added (GVA), excluding agriculture and public administration, is expected to remain robust at 8%, mirroring the momentum seen in the first quarter (Q1 FY26). This figure, according to the bank, better reflects the underlying health of domestic economic activity.
GVA and Nominal GDP
While the headline GDP growth is strong, the report provides a nuanced view of other key indicators:
- Gross Value Added (GVA): GVA growth for Q2 FY26 is projected at 7.3%, a rise from 5.8% in Q2 FY25, though slightly lower than the 7.6% seen in Q1 FY26.
- Nominal GDP: Nominal GDP growth (which includes inflation) is expected to slow down to 8.0% in Q2, down from 8.8% in Q1. This slowdown is primarily attributed to subdued deflator growth (lower inflation).
Outlook and Potential Headwinds
Union Bank projects an overall FY26 GDP growth target of 7.1%, an upward revision. However, the report cautions that the second half of the fiscal year (H2 FY26) may face moderation due to a few factors:
- Fading Statistical Drivers: The favorable base effects that boosted the first half are expected to diminish.
- Lagged Tariff Impact: The full effect of the front-loaded exports and the US tariffs will likely be felt in the subsequent quarters.
- Trade Deal Delay: Delays in concluding a comprehensive trade agreement between the US and India could continue to weigh on export-led growth.
- Inflation Uptick: Both Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation could see an increase in Q4 FY26.
Conversely, the bank notes that recent Goods and Services Tax (GST) rate cuts are expected to support demand and positively impact the Q3 FY26 GDP numbers.
