India’s Economy Set for Robust 7.4% Growth in 2025/26, Exceeding Initial Projections

India’s economic trajectory continues to demonstrate resilience and momentum, with the National Statistics Office projecting that the country’s economy will grow at 7.4% in the fiscal year 2025/26, significantly exceeding the government’s initial projection range of 6.3%-6.8%. The forecast, released on Wednesday, January 7, 2026, marks a substantial acceleration from the 6.5% growth recorded in the fiscal year 2024/25 and positions India as one of the world’s fastest-growing major economies.

The First Advance Estimates released by the National Statistics Office under the Ministry of Statistics and Programme Implementation will serve as the foundational data for India’s federal budget, scheduled to be announced on February 1, 2026. These preliminary estimates, while subject to revisions as data coverage improves over time, provide crucial insights into India’s economic health and inform key fiscal policy decisions including deficit targets, spending allocations, and borrowing requirements.

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Strong Growth Momentum Across Multiple Indicators

In absolute terms, real GDP at constant 2011-12 prices is estimated to reach Rs 201.90 lakh crore in FY 2025-26, up from the provisional estimate of Rs 187.97 lakh crore in FY 2024-25. This represents robust expansion in the country’s productive capacity and economic output.

In nominal terms, which factor in inflation, the economy is expected to grow at 8%, compared with the 10.1% estimate in the annual federal budget announced last February. Nominal GDP at current prices is projected to reach Rs 357.14 lakh crore in FY 2025-26, compared with Rs 330.68 lakh crore in the previous financial year. The narrowing gap between nominal and real GDP growth reflects moderating inflation pressures, with Chief Economist of Crisil, Dharmakirti Joshi, noting that the 60 basis point differential represents the smallest spread since 2011-12.

Real Gross Value Added (GVA), a key measure of economic output that excludes net product taxes, is estimated at Rs 184.50 lakh crore in FY 2025-26, up from the provisional estimates for FY 2024-25 of Rs 171.87 lakh crore, reflecting a 7.3% growth rate. Nominal GVA is estimated to reach Rs 323.48 lakh crore in FY 2025-26, up from Rs 300.22 lakh crore in FY 2024-25, reflecting a 7.7% growth rate.

Services Sector Emerges as Primary Growth Driver

The buoyant services sector has emerged as the principal engine driving India’s economic expansion in FY 2025-26. Financial, real estate and professional services, along with public administration, defense and other services, are estimated to register substantial growth of 9.9% at constant prices during the fiscal year. This remarkable performance underscores the continued strength of India’s service-oriented economy and its increasing integration into global value chains.

Trade, hotels, transport, communication and services related to broadcasting are projected to expand by 7.5% during the year, reflecting continued recovery and expansion in consumption-linked services. The resilience of these sectors demonstrates India’s successful navigation of post-pandemic challenges and the restoration of consumer confidence across urban and rural markets.

The services sector’s dominance in India’s economic structure continues to deepen, accounting for an increasingly larger share of overall economic output and employment. This structural shift toward services reflects India’s competitive advantages in technology, business process outsourcing, financial services, and professional services that have positioned the country as a global hub for service delivery.

Manufacturing and Construction Show Solid Performance

In the secondary sector, manufacturing and construction are estimated to achieve a growth rate of 7.0% in FY 2025-26, indicating steady industrial and infrastructure activity. Manufacturing, which accounts for approximately 13% of GDP, is projected to expand 7% year-on-year in 2025/26, a significant improvement compared with the 4.5% growth recorded a year ago.

This manufacturing acceleration reflects multiple positive developments including improved capacity utilization, strong order books across key industries, government initiatives promoting domestic manufacturing through programs like “Make in India,” and increasing foreign direct investment in manufacturing sectors. The production-linked incentive schemes introduced by the government for strategic sectors including electronics, automobiles, pharmaceuticals, and advanced chemistry cell batteries appear to be yielding tangible results in expanding India’s manufacturing base.

Construction output, while still registering healthy growth of 7%, represents a moderation from the 9.4% expansion recorded in the previous year. This slight deceleration may reflect the high base effect from the previous year’s exceptional infrastructure push and potential constraints in land acquisition, environmental clearances, or skilled labor availability in certain regions. Nevertheless, the 7% growth rate remains robust and indicates continued momentum in infrastructure development, real estate construction, and urban development projects.

Public capital investment continues to serve as a critical growth driver, with the government maintaining its emphasis on infrastructure development including highways, railways, ports, airports, and urban infrastructure. These investments not only contribute directly to GDP growth but also create multiplier effects through employment generation, demand for construction materials, and improvements in logistics efficiency that benefit the broader economy.

Consumption and Investment Dynamics

Private consumption, which accounts for approximately 60% of India’s GDP, is projected to expand by 7% year-on-year in FY 2025-26, representing a slight moderation from the 7.2% expansion recorded in the previous fiscal year. This consumption growth reflects improving household incomes, stable employment conditions, moderating inflation that enhances purchasing power, and continued consumer confidence despite global economic uncertainties.

The slight deceleration in consumption growth may reflect several factors including the high base effect from the previous year’s strong rebound, potential caution among middle-income households facing persistent inflation in food and essential items, and possibly a shift in consumption patterns with households allocating larger shares of budgets to savings or debt repayment following the pandemic-induced financial stress.

Government spending is estimated to rise by 5.2% year-on-year in 2025/26, up from a 2.3% increase the previous year. This acceleration in government expenditure reflects continued commitment to infrastructure development, social welfare programs, and defense modernization while maintaining fiscal discipline. The measured increase suggests the government is balancing growth support with fiscal consolidation objectives.

Private investment, measured through Gross Fixed Capital Formation (GFCF), is projected to grow by 7.8% at constant prices in FY 2025-26, higher than the 7.1% growth recorded the year before. This strengthening investment momentum is particularly encouraging as it suggests growing business confidence, improving corporate balance sheets that enable increased capital expenditure, favorable policy environment supporting investment, and expectations of sustained demand growth that justify capacity expansion.

The investment uptick spans multiple sectors including manufacturing capacity expansion, digital infrastructure, renewable energy projects, and commercial real estate. Strong corporate earnings, declining interest rates following monetary policy easing, and government incentives for capital-intensive sectors have collectively created a more conducive environment for private investment.

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Agricultural Sector Performance and Challenges

Growth in farm output, which employs more than 40% of India’s workforce, is seen at 3.1% in the current fiscal year, representing a significant deceleration from the 4.6% growth recorded a year ago. Agriculture and allied activities’ slower growth trajectory reflects several challenging factors including uneven monsoon distribution despite overall adequate rainfall, persistent issues in certain crops and regions, structural challenges in agricultural productivity, and potential impacts from global commodity price fluctuations on export-oriented agricultural products.

The agricultural sector’s performance remains critical not only for GDP growth but also for rural incomes, food security, and social stability given its massive employment share. The modest 3.1% growth rate, while positive, highlights ongoing challenges in achieving sustainable and equitable agricultural development. These challenges include fragmented landholdings that limit economies of scale, inadequate irrigation infrastructure leaving much of Indian agriculture rain-dependent, limited adoption of modern farming techniques and technologies in many regions, and market access issues that prevent farmers from realizing fair prices for their produce.

Government initiatives including minimum support prices, crop insurance schemes, direct income transfers to farmers, and investments in rural infrastructure aim to address these structural challenges. However, transforming Indian agriculture into a high-productivity, sustainable, and remunerative sector remains a long-term endeavor requiring sustained policy focus, technological innovation, and institutional reforms.

Utility Sectors Show Moderate Expansion

Electricity, gas, water supply and other utility services are projected to record growth of 2.1% during FY 2025-26, showing moderate expansion in these essential infrastructure sectors. This relatively subdued growth may reflect capacity constraints in power generation and distribution, operational challenges in the gas sector, and infrastructure limitations in water supply systems.

The utility sector’s performance is critical for broader economic growth as reliable, affordable energy and water supplies are prerequisites for industrial expansion, commercial activity, and improved quality of life. The modest growth rate suggests potential bottlenecks that may require policy attention including accelerating renewable energy capacity addition, modernizing power distribution infrastructure to reduce transmission losses, expanding gas pipeline networks to enable wider gas usage, and improving water supply and treatment infrastructure.

Economic Context and Comparative Perspective

India’s projected 7.4% growth rate for FY 2025-26 positions the country as one of the fastest-growing major economies globally, outpacing most developed and developing nations. This strong performance comes against a backdrop of global economic uncertainty characterized by geopolitical tensions, trade policy changes, monetary policy tightening in major economies, and lingering effects of pandemic-related disruptions.

The Indian economy’s resilience reflects several structural strengths including a large domestic market that provides cushion against external shocks, demographic dividend with a young and growing workforce, increasing digital adoption transforming economic activity, improving infrastructure that enhances productivity, and policy reforms that have enhanced the business environment.

India’s growth trajectory has been supported by favorable external factors including relatively low global oil prices that reduce import bills and inflation pressures, above-normal monsoon rainfall supporting agricultural output, robust remittance inflows from overseas Indians, and continued foreign investment interest despite global capital flow volatility.

Chief Economist Dharmakirti Joshi attributed India’s resilient growth momentum to favorable policy environments, strong corporate balance sheets that enable expansion, positive developments like above-normal monsoon and low oil prices, and continued strength in the services sector. Despite some hurdles, public capital investment remains a key growth driver, complemented by the thriving services sector and gradually recovering manufacturing activity.

Implications for Fiscal Policy and Budget 2026

The First Advance Estimates released by the National Statistics Office will form the critical foundation for India’s Union Budget for fiscal year 2026-27, scheduled to be presented on February 1, 2026. These estimates underpin key fiscal calculations including projected tax revenues based on economic activity, fiscal deficit targets expressed as percentages of GDP, state government fund devolution calculations, and borrowing requirements for financing the deficit.

The stronger-than-initially-expected growth projection of 7.4% provides the government with greater fiscal space for policy initiatives. Higher GDP growth translates to higher tax collections even at constant tax rates, potentially allowing the government to pursue both fiscal consolidation and strategic spending increases. The government may utilize this favorable outlook to allocate additional resources toward priority sectors including infrastructure development, education and skill development, healthcare system strengthening, and social welfare programs.

However, the moderation in nominal GDP growth to 8% compared to earlier projections of 10.1% suggests that tax buoyancy—the relationship between tax revenue growth and GDP growth—may face some pressure. This requires careful revenue forecasting and may constrain the government’s ability to expand spending dramatically while maintaining fiscal discipline.

The budget will need to balance multiple objectives including sustaining the growth momentum through supportive fiscal policy, continuing infrastructure investment to address bottlenecks, maintaining social spending to address poverty and inequality, supporting agricultural sector transformation, and gradually reducing fiscal deficits to ensure long-term debt sustainability.

Challenges and Risks to Growth Outlook

While the 7.4% growth projection is encouraging, several challenges and risks could affect actual outcomes. Global economic uncertainties including potential recession in major economies, trade policy changes affecting exports, and geopolitical tensions disrupting supply chains pose external risks. Domestically, persistent inflation in food items affecting rural consumption, employment generation challenges despite growth, agricultural sector vulnerabilities to weather and market conditions, and financial sector stress in certain segments require ongoing policy attention.

The manufacturing sector’s recovery, while positive, needs to be sustained through continued policy support, skill development initiatives, technological upgradation, and integration into global supply chains. The agricultural sector’s modest growth highlights the need for structural reforms, technology adoption, improved market linkages, and climate-resilient farming practices.

Infrastructure bottlenecks in power, transport, and logistics could constrain growth if not addressed through sustained investment. Human capital development including education quality, skill development, and healthcare improvements remains critical for long-term growth sustainability.

Conclusion: Optimistic Outlook Amid Global Uncertainties

India’s projected 7.4% economic growth for fiscal year 2025-26 represents a strong performance that underscores the country’s economic resilience, structural strengths, and effective policy management. The growth acceleration from 6.5% in the previous year, driven primarily by the buoyant services sector and supported by recovering manufacturing and steady construction activity, positions India as a bright spot in the global economic landscape.

The First Advance Estimates provide an optimistic foundation for fiscal year 2026-27 budget planning and reflect confidence in India’s economic trajectory. However, realizing this growth potential requires continued policy focus on addressing structural challenges, maintaining macroeconomic stability, sustaining infrastructure investment, promoting inclusive growth that benefits all segments of society, and navigating external uncertainties effectively.

As India progresses through fiscal year 2025-26, monitoring actual economic performance against these projections, policy responses to emerging challenges, and global economic developments will be critical. The forthcoming budget on February 1, 2026, will provide insights into how the government plans to capitalize on this growth momentum while addressing persistent challenges and positioning the economy for sustained long-term development.

The 7.4% growth forecast, if achieved, would cement India’s status as one of the world’s fastest-growing major economies and demonstrate the country’s capacity to maintain robust economic expansion despite global headwinds. This performance would support job creation, poverty reduction, and improved living standards for India’s 1.4 billion people while contributing positively to global economic growth. The challenge ahead lies in translating this aggregate growth into broad-based prosperity, ensuring that economic expansion creates opportunities across regions, sectors, and social groups while maintaining environmental sustainability and social cohesion.

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By: Montel Kamau

Serrari Financial Analyst

8th January, 2026