Saturday, 10 Jan, 2026
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Maintaining 7%-plus growth will hinge on reforms, private investment and managing a tougher global climate. The Budget will be the first test of whether policymakers recognise that shift
The first advance estimates of GDP for 2025-26 suggest that the economy remains in robust shape, even as the ground beneath it grows more uncertain. The National Statistics Office projects real growth of 7.4 per cent, marginally above the Reserve Bank of India’s estimate of 7.3 per cent and a clear improvement over last year’s 6.5 per cent. In today’s global context, that qualifies as strong performance.
This headline number, however, needs unpacking. Growth in the first half of the year was a brisk 8 per cent, which means the second half is expected to slow to about 6.9 per cent. The deceleration is real, but not alarming. More importantly, the growth is holding up despite global trade tensions, high US tariffs, and weak demand in several advanced economies.
A notable feature of the estimates is the sharp divergence between real and nominal growth. Nominal GDP is projected to grow by just 8 per cent, well below the 10.1 per cent assumed in last year’s Budget. This gap reflects unusually low inflation. While this helps households and allows the central bank to cut rates — the RBI has reduced policy rates by 125 basis points in 2025—it complicates fiscal arithmetic.
Nominal GDP matters because tax revenues, fiscal deficit ratios, and debt dynamics are all calculated in current prices. At Rs 357 lakh crore, the size of the economy in nominal terms is slightly above what the Budget assumed, so there is no immediate shock. But with revenue growth remaining tepid, keeping the fiscal deficit at 4.4 per cent of GDP will still require discipline.
This matters more because the government plans to shift to a debt-to-GDP ratio as the fiscal anchor from next year. That makes nominal growth—not just real growth— the key variable. Inflation is expected to edge up in the coming quarters, which should provide some relief on this front. But for now, the cushion is thin.
On the demand side, the composition of growth looks healthier than last year. Investment remains the main driver. Gross fixed capital formation, which accounts for about 30 per cent of GDP, is estimated to grow 7.8 per cent, up from 7.1 per cent last year. This is largely on the back of sustained public capital expenditure. Whether this momentum can be maintained as fiscal constraints tighten will be one of the big questions in the coming Budget.
Consumption tells a mixed story. Private consumption, which makes up nearly 60 per cent of GDP, is expected to grow 7 per cent, slightly slower than last year. Government consumption, in contrast, is projected to rise by 5.2 per cent, more than double last year’s pace. In other words, the state is still doing much of the heavy lifting.
The supply-side picture shows a clear shift. Agriculture growth is expected to moderate to just over 3 per cent after a strong monsoon-led performance last year. Manufacturing, however, is projected to accelerate to 7 per cent from 4.5 per cent, while services growth is expected to cross 9 per cent after two subdued years. This revival in manufacturing is crucial if India is to move towards more balanced growth.
External conditions remain the biggest source of risk. Despite fears, exports are estimated to grow 6.4 per cent, slightly better than last year, suggesting that high US tariffs have not yet done serious damage. But uncertainty persists. Trade agreements with the US and the European Union are still unresolved, and delays could worsen balance-of-payments pressures. The strain is already visible in the rupee and in capital flows. Foreign portfolio investors sold more than $18 billion of Indian equities in 2025.
One symbolic milestone will be crossed this year: India is set to become a $4 trillion economy, making the journey from $3 trillion in just four years. At current exchange rates, it has overtaken Japan to become the world’s fourth-largest economy. This is no small achievement.
Yet size should not be confused with comfort. A new GDP series with a revised base year, due next month, may change how growth is measured. More importantly, the easy gains from public spending and low inflation may be behind us. Sustaining 7-plus growth will now depend on reforms, private investment, and how India navigates a more hostile global environment. The Budget will offer the first clues on whether the government recognises that shift.
