GDP data signal resilience, strengthening case for rate pause

There is a growing likelihood of a prolonged pause in key policy rates, as India’s growth–inflation dynamics remain broadly balanced. From a monetary policy perspective, real GDP growth for the first half of the fiscal has been revised lower to 7.6 per cent from the earlier estimate of 8.0 per cent under the 2011–12 series.

This downward revision helps justify the rate actions taken through the course of the fiscal. At the same time, growth remains resilient, prompting Icra to expect a prolonged pause in policy rates, especially amid expectations of a base-led uptick in CPI inflation in the near term.

India’s real GDP growth is estimated to have moderated to 7.8 per cent in the third quarter. This slowdown was largely anticipated and was driven by weaker performance in agriculture and non-manufacturing industrial sectors such as mining, electricity and construction.

Encouragingly, manufacturing gross value added (GVA) expanded at a double-digit pace for the fifth consecutive quarter, underscoring the sector’s sustained momentum. Services GVA growth also improved, rising to a seven-quarter high of 9.5 per cent in Q3, reflecting strength in contact-intensive and high-value services.

The Second Advance Estimate pegs GDP growth for FY26 at a robust 7.6 per cent. On the production side, both manufacturing and services are expected to record an improvement in growth rates over the previous year. Implicitly, GDP growth is projected to moderate to a three-quarter low of 7.3 per cent in Q4, which nevertheless remains healthy.

A key development this year is the material revision of GDP data for FY23–FY25 following the shift to the new 2022–23 base year. Notably, the size of the Indian economy is now estimated to be somewhat smaller than under the 2011–12 base.

Nominal GDP for FY24 and FY25 is about 3.8 per cent lower than earlier estimates. As a result, the fiscal deficit-to-GDP ratio for these years would be around 15–20 basis points higher than previously assumed.

This recalibration also has implications for future fiscal targets. Assuming nominal GDP growth of 10 per cent, the fiscal deficit for FY27 would work out to about 4.46 per cent of GDP, compared to the 4.3 per cent projected in the Union Budget.

Further, the debt consolidation roadmap is likely to become more demanding. Debt-to-GDP is now pegged at 57.5 per cent for FY27, around 1.9 percentage points higher than the budgeted estimate of 55.6 per cent, implying a steeper consolidation path through FY31.

Looking ahead, analysts project GDP growth of around 7 per cent in FY27, supported by favourable developments such as an interim trade deal with the US featuring lower tariffs, improving domestic investment prospects, and a strong push to public capital expenditure in the Union Budget.

Measures including GST rate reductions, cumulative policy rate cuts, and a lower-than-expected rise in food inflation, combined with positive farm sector trends, point to a supportive environment for private consumption.

Overall, the first GDP prints under the new series present a picture of largely broad-based and resilient growth, reinforcing expectations of policy stability from the Reserve Bank of India in the near term.