GDP Growth Surpasses Expectations in First Quarter

India's GDP Growth Surprises with 7.8% in Q4 FY2026

India's GDP growth reading for Q4 FY2026 printed at a robust 7.8% in the quarter, materially exceeding our forecast of 7.0%. This upside surprise comes despite fears that early signs of a slowdown would manifest in Q4 following the onset of the West Asia conflict.

On the expenditure side, the growth in Private Final Consumption Expenditure (PFCE) decelerated sharply to a 4-quarter low of 7.1% in Q4 FY2026 from 8.2% in Q3. This was along expected lines, as the GST rationalisation had boosted consumption in Q3 FY2026, and this effect is likely to have partly dissipated thereafter in Q4. However, the growth in Government Final Consumption Expenditure (GFCE) improved slightly in Q4, amid a surge in Government revenue spending.

Private investment, on the other hand, surged in Q4 FY2026. Gross Fixed Capital Formation (GFCF) expanded by 10.8% in Q4 FY2026, the fastest pace in at least 12 quarters, up from 8.2% in Q3 FY2026. This is somewhat surprising, given that the Government of India's (GoI) capex had contracted by a sharp 23.3% YoY in the quarter. This suggests that growth was driven by private capex in the quarter, whereas we had expected private capex to be circumspect in this quarter, particularly after the onset of the West Asia conflict.

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On the production side, the dip in growth was largely led by the manufacturing sector, which saw the YoY growth decelerate to a 6-quarter low of 7.3% in Q4 FY2026 from 12.8% in Q3. The slowdown is not surprising, given that manufacturing volume growth, as reflected in the IIP data, had eased, and margins were expected to come under pressure owing to the adverse impact of rising input costs, particularly towards the end of the quarter. Nevertheless, manufacturing GVA growth has remained surprisingly strong through FY2026, despite the sluggishness in non-oil exports.

The growth in the other industrial segments, including mining, electricity, and construction, accelerated in Q4 FY2026 relative to Q3. Besides, the growth in agriculture and allied activities improved between these quarters, partly reflecting the healthy expansion in rabi output, as per the third advance estimates.

Services GVA expanded by a surprisingly elevated 9.9% in Q4 FY2026, in line with that seen in Q3, given that the high-frequency indicators pertaining to the services sectors had displayed a mixed trend in their growth performance between these quarters. This resulted in the upside surprise relative to market estimates for the headline GDP growth print in the quarter.

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Overall, with GDP growth far exceeding expectations in Q4, the print for full year FY2026 now stands at 7.7%, as per the provisional estimate, as against the 7.6% estimated in the Second Advance Estimate. This marks a healthy acceleration over the 7.1% growth seen in FY2025, led by an uptick in the growth rates across consumption and investment activity on the expenditure side, and services on the production side.

Looking ahead, elevated energy prices and heightened uncertainty around the resolution of the conflict are set to adversely impact corporate profitability and investment demand. Besides, higher inflation is expected to impact household budgets and consumption demand. Further, the potential development of El Nino conditions and sub-par monsoon rainfall in 2026 have weakened the agricultural outlook and rural demand prospects for H2 FY2027, although the spatial and temporal distribution remains key. Assuming an average crude oil price of $95/barrel, ICRA pegs the GDP growth to print below 6.5% in FY2027, with the West Asia crisis expected to compress growth in H1 FY2027.

The higher-than-expected Q4 FY2026 GDP print may not have altered the MPC's decision to maintain status quo, as the adverse impact of the West Asia crisis will manifest into lower growth prints in Q1 and Q2 FY2027. While our GDP growth projections for FY2027 are lower than the MPC's estimate of 6.6%, we broadly concur with its CPI inflation forecast of 5.1% for the fiscal, which was raised by 50 bps relative to that issued in April 2026. At the current juncture, we expect a back-ended rate hike in 2026, after there is some more clarity on the monsoon outcomes.