India’s Goldilocks Interlude

Even as global shocks mounted, the first half of FY26 revealed an economy that could still surprise on the upside.

For much of the first half of FY26, the narrative around India’s economy seemed almost wilfully gloomy. Uncertainty over American tariffs, a stalled trade deal with Washington, Western pressure to curtail Russian oil imports, China’s chokehold over rare earths and the ever-present risk of an oil shock from the Iran–Israel conflict combined to darken the global mood. Donald Trump’s jibe that India was a “dead economy” swiftly echoed by Rahul Gandhi, the country’s Leader of Opposition, added a political edge to the pessimism. Yet the data told a different story. Far from wilting under pressure, India absorbed these shocks with surprising ease. H1 FY26 marked not just resilience, but a decisive shift from recovery to acceleration.

Genuine Momentum

The headline numbers were striking. Real GDP growth climbed to 7.8 percent in the first quarter, a five-quarter high, before strengthening further to 8.2 percent in the second, the fastest pace in six quarters. That pushed average growth for the half year to 8.0 percent, well above the 6.1 percent recorded in H1 FY25. Nominal growth was more subdued but steady, averaging 8.8 percent across the two quarters. In absolute terms, real GDP at constant prices rose to Rs 48.63 trillion in Q2, up from Rs 44.94 trillion a year earlier, while nominal GDP reached Rs 86.05 trillion from Rs 78.40 trillion. Four consecutive quarters of accelerating growth suggest that momentum was genuine and broadening.

Unlike earlier spurts driven by a single sector, growth in H1 FY26 was unusually well balanced. Agriculture staged a modest recovery, expanding by 2.9 percent, supported by a strong kharif harvest and healthy rabi sowing. This steadied rural incomes and helped tame food prices. Industry emerged as the standout performer, growing 7.6 percent. Manufacturing, in particular, gathered pace. Construction remained robust, expanding above 7 percent, though mining lagged, contracting in Q1 and stagnating thereafter.

Services, as ever, provided the backbone. Averaging growth of 9.3 percent, they benefited from a familiar mix of digitalisation and demand recovery. Financial, real estate and professional services thrived on digital banking, fintech adoption and IT-enabled exports. Trade, hotels and transport gained from e-commerce growth, a revival in tourism and better infrastructure. Public administration and defence were buoyed by government spending. Together, these sectors ensured that India’s expansion rested on multiple pillars rather than a single prop.

The most important of those pillars was private consumption. Household spending emerged as the primary driver of growth, with private final consumption expenditure rising 7.9 percent in Q2, up from 7.0 percent in Q1 and 6.4 percent a year earlier. Falling inflation lifted real incomes, tax relief boosted disposable earnings, GST rationalisation lowered costs and a series of rate cuts by the Reserve Bank of India reduced borrowing expenses. Rural demand strengthened on the back of higher farm output and employment, even outpacing urban consumption for the first time in several quarters. Rising purchases of consumer durables, travel and hospitality pointed to a shift towards discretionary spending.

Government consumption played a supporting role. Public spending jumped in Q1 on the back of welfare outlays, though fiscal consolidation targets limited its scope thereafter. Investment added further impetus. Gross fixed capital formation grew 7.3 percent in Q2, while government capital expenditure surged by 31 percent year on year to Rs 3.06 lakh crore, underpinning infrastructure creation. More intriguingly, private investment showed tentative signs of revival, accounting for 71 percent of fresh investments compared with 61 percent a year earlier.

Benign Backdrop

All this unfolded against a benign macroeconomic backdrop that policymakers rarely enjoy. Growth surged to multi-quarter highs even as inflation fell to multi-year lows. The compression in headline inflation owed much to food prices. Good monsoons and strong kharif output boosted supply, while falling vegetable and pulse prices weighed heavily on the consumer price index, where food accounts for nearly half the basket. Core inflation stayed contained, aided by spare capacity and subdued demand pressures, despite some firmness in precious metals. Yet this sweet spot is unlikely to last. Food prices remain hostage to the weather, and the RBI expects inflation to rise to 2.9 percent in Q4 FY26 and 4.5 percent in FY27 as base effects fade.

The policy mixes behind the surge were deliberate. Fiscal consolidation was paired with growth-friendly measures such as tax cuts, GST rationalisation and a sharp increase in capital spending. Monetary easing, amounting to a cumulative 100 basis point rate cut, lowered borrowing costs and spurred demand. Strong monsoons, agricultural support, infrastructure investment and labour reforms worked in tandem, delivering a coordinated push rarely achieved in practice.

Externally, India proved more insulated than many expected. Even steep US tariffs imposed in August failed to derail growth. Low export dependence, diversified markets and the resilience of services softened the blow. Demand substitution from South Asia, Southeast Asia and the Middle East helped offset losses while capital inflows continued, reflecting investor faith in India’s reforms and demographics.

Yet beneath the buoyancy lurked fiscal unease. The Economic Survey argues that India needs real growth of 8 percent and nominal growth of 10 percent to achieve its ‘Vikasit Bharat’ ambitions. While the real target was met, nominal growth at 8.8 percent fell short. Tax revenues rose just 4 percent in the first seven months against a 12.5 percent target, forcing reliance on volatile non-tax receipts. Capital spending surged while revenue expenditure was restrained, but the compressed tax-to-GDP ratio underscored a hard truth: strong real growth alone cannot guarantee fiscal stability.

The second half of FY26 will be harder. Tariff effects will bite and global uncertainties will persist. The RBI expects growth to moderate to around 6–6.5 percent. That would still make India the world’s fastest-growing major economy, even if the ‘Goldilocks conditions’ of H1 fade. The challenge now is to turn a fortunate interlude into a durable trajectory.

(The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)