Buoyant buyers make firms’ firm
Let us begin with the reasons that are not responsible for the almost spectacular 8.2 per cent GDP growth rate in the second (July- September) quarter of 2025 26. What has not triggered this higher-than-expected rate is the impact of the GST 2.0 regime. Sure, there were anecdotal reports in the last week of September about how the day the new GST slabs were introduced on the first day of Navratri, 25,000 Maruti cars were booked and sold. Similar figures emanated from other manufacturers across a few sectors.
However, one needs to remember that the second quarter ended on September 30, and the new tax rates were applicable over the last 10 days of the month. The real record sales and purchases made by ebullient consumers came in the month of October, 2025, during the Dussehra-Diwali period. Hence, the major implications of the new regime will perhaps be seen in the third quarter growth rates, which will come out next year. So, hold your horses, thoughts, assumptions, and analysis. The 8.2 per cent growth is not because of GST.
What can then be the reasons for the stupendous growth? If one looks carefully at the data for the first half (two quarters) in 2025-26, and compare it to the 2024-25 numbers, the trends are crystal clear. The primary factors behind the sudden surge in GDP is because of an upsurge in manufacturing as well as services, alongside a sustained growth in consumer spending. For those who have tracked the economy after the pandemic, one of the key negatives since 2020 was the lack of positive consumer sentiments, and buying enthusiasm.
The results of the consumer confidence trackers and surveys, as announced by The Reserve Bank of India, and private pollsters like C Voter consistently showed negative sentiments. This is why since 2021 22, even though the GDP growth rates were fairly-high year after year, consumer spending remained subdued. Most of the growth since the pandemic came largely due to government spending, official support, and massive investments in infrastructure. The private sector took the back seat, as did private household consumption.
Something different happened in 2025, especially since April. There is no doubt about it. For instance, in the first quarter of 2025 26, the GDP grew at a healthy 7.8 per cent. This was accompanied by a robust growth in consumption and spending. Remember, the activity in these three months were before GST 2.0. This was followed by an even better 8.2 per cent growth in the second quarter, which accounted for 10 days of the new GST rates and slabs.
Clearly, consumer spending propelled growth in the past six months, which may have pushed manufacturers to hike production. Or, maybe it was vice versa. The producers went on a spree in anticipation of higher demand, and higher expenditure. While part of the more than nine per cent growth in manufacturing in the second quarter was spurred by demand, another part was possibly due to firms “pushing production ahead of global tariff changes, and export orders.” Remember, the two-phase US tariffs came into effect in August, and exporters wanted to sell more before them.
Yet, if one does include domestic demand as a crucial factor, it was aided by low inflation. After years of high retail prices since 2021, they finally come down to extremely moderate levels. Now, there is an element of stability when it comes to labour force participation rate as well as income levels of households. These helped consumer sentiments which, in turn, helped the growth in demand. This created a mini-virtuous cycle, whereby the demand for normal goods, and essentials, extended to consumer durables and gadgets.
Manufacturing gained, which is reflected from the robust and higher gross fixed capital formation, which means that the private sector has started investing in new capacities. The data is clear. Gross fixed capital formation in the second quarter was 7.3 per cent, which was lower than 7.8 per cent in the first one, but considerably higher than 6.7 per cent in the same period the previous year. Private consumption was up, compared to a decline, in effect a negative growth, in government consumption in the second quarter.
What remains to be seen, of course, is whether the first two quarters this fiscal represent a flash in the pan, or a new sustainable growth momentum. Already, some experts have warned about the possibility of lower growth rates in the next two quarters. While there always will be skeptics, it is a given that sentiments were bound to rebound. Since the first quarter, rural demand, which was muted for a long time, has shown remarkable signs of resurgence. This may lead to a virtuous cycle of growth that may be sustained in the future.
However, one needs to wait for the third quarter numbers to figure out India’s growth journey. It is in the next quarter that India will see the real impact of the punitive tariffs of 50 per cent imposed by the US on exports, and the manufacturing sector. By the time the third quarter figures are out, we will know the mindset of the central bank, whose bi-monthly policy is due, and the finance minister, who will present the Union Budget by then. The policy-maker, and regulator may add more zip to the GDP growth impetus.
According to a media report, “Government-led expenditure has sustained demand; however, private investment could also have helped drive growth. Indian corporates have good cash holdings, and their balance sheets are well-deleveraged. Besides, the private corporates have the risk appetite, as outward FDI (foreign direct investment) is rising fast. Yet global uncertainties, and the US tariff weigh on their domestic commitments. The challenge is channeling this capital back home to complement public spending, and drive balanced, durable domestic investment growth.”
Several experts are now re-rating the country’s growth estimates. One of them pushed up the 2025-26 figure from 6.5 per cent to seven percent due to the performance in the first two quarters. Still, there are a few niggling doubts in the second half. Some experts feel that the economy will struggle to cross the six per cent in the second half of this fiscal. One of the main reasons will be that government investment is likely to slow down, and the slag will need to be picked up by the private sector. One is not sure if this will happen, and how fast it will happen. This is because the capacity utilisation levels are in the 75 per cent range. The decision to add capacities is tricky.
The author has worked for leading media houses, authored two books, and is now Executive Director, C Voter Foundation; views are personal
