India Sees 7.4% GDP Growth in FY26

The government of India on Jan 7 projected the GDP to grow at 7.4% for FY26, showing confidence that domestic demand can keep the economy moving, despite the slowdown in major economies and global tensions.

This estimate will form the base for the upcoming Union Budget and will influence how both markets and policymakers view the year ahead. It also comes at a time when questions are being raised globally about how long emerging economies can stay insulated from weak external demand. So, what is really driving this confidence?

Why The 7.4% GDP Growth Estimate?

The 7.4% growth projection marks a clear improvement over FY25’s 6.5% and sits slightly above the Reserve Bank of India’s most recent estimate. It is more important to note the trend than the figure. Economic activity picked up over the first half of the year. GDP growth accelerated to 8.2% in the September quarter of FY26, which is the strongest rate recorded over the past six quarters. That followed a solid 7.8% expansion in the June quarter, suggesting momentum was building rather than fading.

Inflation trends are also playing a role in shaping the outlook. The growth of nominal GDP is predicted to decelerate to 8%, compared to a rate of just under 10% in the past year. The main factor for this change is a reduction in inflationary pressures and not a reduction in real activity.

Together, these factors have allowed the government to take a more optimistic view of growth, despite a less supportive global backdrop.

Is Domestic Demand Still Doing The Work?

For now, domestic demand remains the main support. Private consumption, which accounts for about 60% of India’s GDP, is expected to expand 7% year-on-year in FY26, compared with 7.2% last fiscal year. This is marginally slower than last year, but steady given the broader environment.

Households appear to be spending cautiously rather than pulling back sharply.

Government spending is projected to rise 5.2% from a 2.3% increase in FY25. This is expected to support overall growth, especially since external demand remains uncertain.

Policy measures have also helped stabilise consumption. Income tax relief for middle-income earners, along with GST rate cuts introduced in September, reduced pressure on household budgets. Businesses say these steps improved price visibility and encouraged consumers to return to discretionary purchases that had earlier been postponed.

Investment conditions have improved as well. Better credit availability, improving balance sheets and a gradual recovery in industrial demand have supported this pickup, even though companies remain cautious about global risks.

Where Are The Supports And The Cracks?

The improvement in activity is most visible in the industry. Manufacturing output is expected to grow 7% in FY26, a sharp rise from 4.5% last year, signalling a revival in industrial production. The construction sector is also expanding, though at a slower pace, with growth estimated at 7%, compared with 9.4% last year, largely due to a higher base.

The agriculture sector is expected to register a 3.1% growth, which is lower compared to last year but is sufficient to support rural household incomes and spending.

Inflation trends have been supportive of the economy. Given the target for consumer price inflation of 2.0%, the RBI had eased its policies by cutting interest rates by 25 bps to 5.25%. Still, risks remain firmly external. The US continues to impose high tariffs, and continued delays in negotiating trade agreements are affecting momentum.

For now, the data suggests India is leaning heavily on domestic demand, fiscal support, and easing inflation. The unanswered question is how durable that cushion will be if global conditions weaken further.

Sources

Hindustan Times
CNBC
Economic Times