FY26 REAL GDP GROWTH AT 7.7% SURPRISES ON THE UPSIDE

FY26 REAL GDP GROWTH AT 7.7% SURPRISES ON THE UPSIDE

The MOSPI published the Q4 and FY26 GDP data points on 05-June 2026. The real GDP growth for FY26 at 7.7% was better than expected, while the nominal GDP growth rate of 8.9% for the full year may have been slightly disappointing. While the nominal GDP growth was impacted in the last quarter due to the spillover of the US-Iran war, real GDP growth benefited from low inflation. For the full year, the real thrust to GDP came from the services sector with nominal growth rate of 12.9% for FY26; a good 340 bps better on yoy basis.

Within the services sector, the thrust came from the trade/hotels/transport and the financial services segment. Both were largely immune to the global supply chain constraints. In the secondary sector, manufacturing put up a good show in Q4, while construction was better than expected. Not surprisingly electricity production was disappointing. Overall, the robust domestic market has kept the Indian economy in business. Of course, the real impact of the war and its aftermath will be felt only in FY27

NOMINAL GROWTH NOT UP TO THE MARK

It is the nominal growth (pre-inflation) that is actually lower on a yoy basis. This can be attributed to the low inflation effect this quarter.

What is so critical about the nominal growth table? Here are the 3 things that stand out.

Why is nominal growth important, while real growth is the general benchmark? It is nominal growth that is an index of jobs created, overall output, and a mirror of how much of economic activity there is in the economy. On that count, the nominal GDP growth in Q4FY26 has been lower compared to Q4FY25. The last quarter impact was due to the supply chain constraints created by the ongoing war in the Middle East.

While services led the growth in nominal GDP, manufacturing did not disappoint despite the supply chain pressures. Within services, the major support came from non-government services like trade, transport, hotels, financial services, outsourcing etc.

On the primary sector front, while an improvement in mining was led by rare earth minerals, the sharp fall in farm output can be attributed to a weak Rabi crop. The problems for the agricultural sector could get further compounded considering that the IMD has projected rainfall at 90% of LPA, and the El Nino effect remains an X-factor.

The nominal GDP growth has been progressively slowing in the last 3 years, and that is one of the factors that has made the Buffett ratio to appear blown up.

REAL GDP GROWTH – THANKS TO LOW INFLATION

Here is a quick look at the real GDP numbers and the break-up by quarter, which is the nominal GDP net of inflation.

The components above are of GVA (which is GDP without the impact of indirect taxes and subsidies). This real GDP growth shows the inflation impact in Q4FY26.

The real GDP growth of 7.8% in Q4FY26 is substantially better than Q4FY25, but that can be attributed more to the lower inflation. Inflation averaged under 3% through the whole of FY25, which explains the edge India had in real GDP growth.

Services (The Anchor) was still led by trade, transport and hotels and accounted for 55% of the GDP basket. Financial services and realty also showed smart growth in Q4FY26. However, the real big story was that manufacturing held up despite supply chain issues.

Agriculture (Lagging Growth) was the area of concern, largely due to the price effect. The gap between Q4FY26 and Q4FY25 is much lower in the real agricultural GDP charts, but that is misleading because it was food inflation that had led headline inflation lower in FY26. Rabi output was much below expected last year.

The farm sector has been under pressure for the year, even as manufacturing held up amidst the supply chain constraints. Services continue to flatter on the upside.

QUICK WORD ON FULL FISCAL YEAR FY26 GDP

Here are some key takeaways from the full year GDP data for FY26; in terms of its composition and the comparison with previous years.

In nominal terms, the GDP growth for FY26 was lower at 8.9%; compared to 9.7% in FY25 and 11.0% in FY24. While the base effect did play a part, the first quarter and the last quarter impacted nominal GDP through tariffs and later due to the war.

However, the real GDP growth in FY26 at 7.7%, was much better compared to 7.1% in FY25 and 7.2% in FY24. This can be largely attributed to a much lower level of average inflation in FY26 as compared to FY25 and FY24.

The risk factor for Indian economy is that this advantage of lower inflation may not sustain in FY25. With a spike in crude prices, war premiums, higher gold prices, and the El Nino factor; inflation is pegged at closer to 5.1% for the fiscal year FY27.

For FY26, the real growth in manufacturing, trade, and financial services was in double-digits, which helped sustain GDP growth at higher levels. However, the farm sector and the mining / quarrying sector have lagged behind the previous years.

The good news is that the FY26 GDP growth at 7.7% has been much better than the street consensus of 7.4%. One can argue that it was led by the services sector, but that has always been the core competency of the Indian economy. But, FY27 could be a different story!