India's Q2 GDP surges 7.8% on spending & export front-loading

India’s real GDP has expanded by 7.8 per cent year-on-year in Q2 2025. The robust growth, which marks a strong start to fiscal 2026 (FY26), was underpinned by heavy front-loading of government spending and exports.

Government capital expenditure rose by 52 per cent and operating spending by 20 per cent in Q2, amplified by base effects from the 2024 election-related Model Code of Conduct, which had curbed public spending. This provided a 2.7 percentage point (pp) boost from gross fixed capital formation and 0.7 pp from government consumption.

Exports also accelerated, growing 6.3 per cent compared to 3.9 per cent in Q1 2025, largely due to front-loaded shipments to the US ahead of President Trump’s tariff measures.

According to US Census Bureau data, India’s Q2 exports to the US far outperformed pre-election trends, though this momentum likely ended in Q3 following tariff hikes to 25 per cent on July 31 and 50 per cent on August 27, BMI, a Fitch Solutions company, said in a release.

BMI continues to project FY26 growth at 5.8 per cent but acknowledges upside risks. To meet this forecast, growth would need to slow sharply to around 5.2 per cent over the next three quarters.

Government spending is expected to tighten as GST reforms—due in October 2025—reduce fiscal revenues by 0.2 per cent of GDP, with only limited offset from higher household consumption. Weak nominal growth in Q2 is also set to weigh on revenues.

Private consumption is forecast to remain a key support, with inflation expected to stay low for much of the year before rising modestly to 3 per cent by March 2026. GST reforms could add 0.2 per cent of GDP to household spending, but rising unemployment linked to weaker exports may temper this benefit.

Looking ahead, fixed investment and government consumption are projected to grow more slowly, and net exports are set to drag due to higher US tariffs. However, if growth momentum proves more resilient, fiscal support could prompt upward revisions to the forecast.

“The headwinds notwithstanding, the 7.8% expansion in Q2 2025 means that growth will have to slow to around 5.2% on average over the next three quarters for full-year growth to hit our current 5.8% forecast. The government may roll out fiscal support if the headwinds are that strong. In other words, an upward revision over the coming weeks is more likely than not, and much will depend on the extent of the slowdown following what appears to have been a heavily front-loaded quarter,” BMI noted.

ALCHEMPro News Desk (HU)