India's GDP growth projected at 6.7% in Q1 FY2026 higher than RBI target of 6.5%: ICRA
The agency noted that however GDP expansion has eased from 7.4 per cent in Q4 FY2025, while it outpaces the Monetary Policy Committee's (MPC's) recent forecast of 6.5 per cent.
The rating agency also said the growth in gross value added (GVA) is expected to ease to 6.4 per cent in Q1 FY2026 from 6.8 per cent in Q4 FY2025.
The slowdown in the industrial sector and agriculture is likely to offset the strong performance of the services sector.
Industrial growth is estimated to fall to 4.0 per cent in Q1 FY2026 from 6.5 per cent in the previous quarter, while agriculture growth is projected at 4.5 per cent compared with 5.4 per cent earlier. On the other hand, services are set to rise to an eight-quarter high of 8.3 per cent, up from 7.3 per cent.
ICRA also expects a double-digit rise in net indirect taxes in nominal terms, though lower than the 22.7 per cent recorded in Q4 FY2025. This improvement comes from a sharp increase in the Government of India's indirect taxes, which grew by 11.3 per cent in Q1 FY2026 against a contraction of 3.1 per cent in Q4 FY2025.
At the same time, the subsidy outgo contracted at a narrower pace of 7.3 per cent, compared with 40.7 per cent in the previous quarter. Because of this, the gap between GDP and GVA growth is expected to stay positive at about 30 basis points in Q1 FY2026, though lower than the 62 basis points in Q4 FY2025.
Government spending has played a key role in boosting growth. Based on CGA data, the Centre's gross capital expenditure surged 52.0 per cent year-on-year to Rs. 2.8 trillion in Q1 FY2026, compared with 33.4 per cent growth in Q4 FY2025 and a 35.0 per cent contraction in Q1 FY2025.
Similarly, the aggregate capital outlay and net lending of 24 state governments rose by 23.0 per cent year-on-year to Rs. 1.1 trillion, after rising 27.0 per cent in Q4 FY2025 and contracting 19.6 per cent in Q1 FY2025.
Project activity also remained strong. The value of new project announcements nearly doubled to Rs. 5.8 trillion in Q1 FY2026 from Rs. 3.0 trillion a year ago. Project completions were recorded at Rs. 2.3 trillion, much higher than Rs. 0.7 trillion in Q1 FY2025, though slightly below Rs. 2.5 trillion in Q4 FY2025.
ICRA noted that services growth, at 8.3 per cent, will continue to support the overall GVA. This is backed by stronger government expenditure. The combined non-interest revenue expenditure of 24 state governments rose by 10.7 per cent year-on-year in Q1 FY2026, compared with 7.2 per cent in Q4 FY2025.
The Centre's non-interest revenue expenditure also turned positive, growing by 6.9 per cent after a contraction of 6.1 per cent in the previous quarter.
On agriculture, forestry, and fishing, ICRA projects growth to moderate to 4.5 per cent in Q1 FY2026 from 5.4 per cent in Q4 FY2025, though it remains robust compared with 1.5 per cent in Q1 FY2025. This is supported by healthy output of most rabi and summer crops in agricultural year 2024-25, as per the third advance estimates.
Looking ahead, ICRA said that improved transmission of monetary easing and the government's recent announcement on forthcoming GST rationalisation could help strengthen urban consumption sentiments ahead of the festive season.
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