Festive stocking, GST cuts to lift industry even as GDP slows to 7%: ICRA

India’s economic growth is expected to ease marginally in the September quarter, with rating agency ICRA projecting GDP expansion at 7 per cent for Q2 FY2026, down from 7.8 per cent in Q1, according to its latest assessment.

The gross value added (GVA) growth is similarly expected to moderate to 7.1 per cent from 7.6 per cent.

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ICRA further said the deceleration is attributed largely to a slowdown in the services sector and softer agricultural output, more than offsetting an expected improvement in industrial activity. Services GVA is projected to ease to 7.4 per cent from 9.3 per cent, while agriculture is set to expand at 3.5 per cent, broadly steady but weighed down by crop damage from excessive rains.

The report noted that the industrial GVA is likely to register a five-quarter high of 7.8 per cent, aided by festive-season inventory stocking, GST-cut-led demand, and front-loaded exports to the US ahead of tariff changes.

Manufacturing GVA could touch 9 per cent, supported by higher merchandise exports, including strong electronics shipments, it said.

Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA, said, “A lower YoY rise in Government spending is likely to weigh on the pace of the GDP and GVA growth in Q2 FY2026 compared to Q1 FY2026. However, inventory stocking related to the early onset of the festive season, enhanced by the GST-rationalisation induced volume pick-up, and upfronting of exports to the US ahead of the tariffs, are expected to boost the performance of the manufacturing sector, and help industry GVA growth outpace that of the services after a gap of four quarters.”

“Unless the GoI’s capex allocation is enhanced and the tariff-related uncertainties ebb, the GDP growth appears set to ease below 7.0% in H2 FY2026. While the well-timed GST rationalisation may result in a steady boost in volumes of consumer non-durables going ahead, consumer durables may see a trend of premiumisation instead of a sustenance of the spike in volumes that was seen during the festive season,” she added.

Government capital expenditure growth slowed to 30.7 per cent in Q2 FY2026 from 52 per cent in Q1, while states saw a 4.6 per cent contraction, reflecting base effects. Revenue expenditure also weakened sharply, with the Centre’s non-interest spending falling by 11.2 per cent year-on-year.

Despite heavy monsoon disruptions, construction activity remained resilient, supported by improved infrastructure goods output and higher central capex levels.

ICRA expects construction GVA growth at 8 per cent in Q2. Mining and electricity are also set to show modest improvement owing to favourable base conditions.