India’s GDP growth seen easing to 7% in Sept quarter on softer services, agri output: ICRA

Rating agency ICRA has projected India’s economic growth to ease to 7% in the September quarter of FY26, moderating from 7.8% recorded in the previous three months, as a slowdown in services and agriculture is expected to outweigh an improvement in industrial activity.

Gross value added (GVA) growth is estimated to dip to 7.1% in Q2 FY26 from 7.6% in Q1, ICRA said, adding that the gap between GDP and GVA growth is likely to turn marginally negative owing to a contraction in net indirect taxes.

ICRA expects net indirect taxes in nominal terms to shrink year-on-year in the quarter, reversing the 9.5% rise seen in Q1, following a 5.2% decline in the Centre’s indirect tax collections and a smaller contraction in subsidies.

“A lower YoY rise in government spending is likely to weigh on the pace of GDP and GVA growth in Q2 compared to Q1,” Aditi Nayar, Chief Economist, Head-Research & Outreach at ICRA, said.

However, she noted that inventory stocking linked to the early festive season, volume gains from GST rationalisation and front-loaded exports to the US ahead of tariffs would support manufacturing, helping industrial GVA growth outpace services for the first time in four quarters.

Nayar said GDP growth could slip below 7% in the second half of FY26 unless the Centre steps up capital expenditure and tariff-related uncertainties ease.

While GST rationalisation may boost non-durables volumes, she said consumer durables may shift towards premiumisation after the festive-season surge.

The Centre’s gross capital expenditure growth slowed sharply to 30.7% in Q2 FY26 from 52% in Q1, although the monthly average spending rose to ₹1.02 lakh crore in the quarter from ₹91,700 crore in Q1.

Capex by 22 state governments contracted 4.6% year-on-year after rising nearly 23% in Q1, primarily due to an adverse base.

Non-interest revenue expenditure of the central government contracted 11.2% in the quarter, compared with a 6.9% increase in Q1, while the same for the 22 states slowed to 5.3% from 10.9%.

ICRA said the services sector is expected to lose momentum, with GVA growth projected to cool to 7.4% from an eight-quarter high of 9.3% in Q1. India’s services exports grew 8.7% year-on-year in Q2, the slowest in six quarters.

Agriculture GVA is estimated to grow 3.5% in Q2, broadly unchanged from Q1, with heavy rainfall, flooding and untimely showers expected to have affected crops despite higher kharif sowing.

Industrial GVA growth is forecast to strengthen to a five-quarter high of 7.8% from 6.3% in Q1, supported by robust manufacturing, construction and a favourable base.

Manufacturing GVA is expected to jump to 9% from 7.7% in Q1, aided by festive-season stocking, GST cuts and stronger merchandise exports.