Backdrop for Budget: 7.4% growth estimated for FY26

THe native american economic system is expected to raise at 7.4% in the on-going financial year, the National Statistical Office (NSO) said in its first advance estimates of gross domestic product released on Wednesday, with manufacturing, services, and government expenditure spurring growth.And the small print of the numbers released suggest that despite low inflation pushing nominal growth, in percentage terms, lower than that assumed in the budget, there is unlikely to be any adverse impact on tax collections and the fiscal deficit -- good news from the perspective of both the macroeconomy and the forthcoming Union Budget.The projected growth rate – there are still three months left for 2025-26 to finish – is not very different from what has been projected by the Reserve Bank of India or private forecasters, and they reiterate the resilience and strength of the Indian economy amidst global headwinds. RBI’s December Monetary Policy Committee (MPC) resolution had projected an annual growth of 7.3% in 2025-26.The predictability of real growth aside, the latest numbers will assure both the finance ministry and fiscal watchers with less than a month to go for the union budget. This is because the nominal GDP value (in absolute terms) has ended up above and not below what was assumed in the 2025-26 Union Budget despite an underwhelming nominal GDP growth because of low inflation. A large shortfall in nominal GDP would have complicated the fiscal math of the government .The headline growth number compares with 6.5% in 2024-25, and is primarily a result of improvement in growth in manufacturing and services. On the expenditure side, the increased growth is on account of a rise in government expenditure and capital formation despite a marginal slowdown in private consumption.While Private Final Consumption Expenditure (PFCE) came down from 7.2% in 2024-25 to 7% in 2025-26, Government Final Consumption Expenditure (GFCE) and Gross Fixed Capital Formation (GFCF) growth increased from 2.3% to 5.2% and 7.1% to 7.8% between 2024-25 and 2025-26.Gross Value Added (GVA) – it is GDP less net indirect taxes – growth increased from 6.4% to 7.3% between 2024-25 and 2025-26. An increase in manufacturing (4.5% to 7%) and services (7.2% to 9.1%) growth drove up the performance despite a slowdown in sectors such as agriculture (4.6% to 3.1%) and construction (9.4% to 7%) between 2024-25 and 2025-26.While a 7.4% GDP growth rate is a pretty good number for the economy as a whole and further cements India’s position as the fastest growing major economy in the world, there is good reason to believe that some parts of the economy and their stakeholders would not have experienced the feel-good of being in a high growth economy. This is primarily because of low inflation keeping nominal growth at much lower levels. Nominal GDP is what matters as far as present income and consumption calculations are concerned. For example, agriculture and allied activities had a nominal GVA component growth of just 0.8% in 2025-26, which is significantly lower than the 3.1% real growth. This is in keeping with the low food inflation over most of the fiscal year. Even when seen as a whole, the 8% nominal GDP growth number is lower than what it has generally been. While nominal GDP growth was lower than 8% in 2020-21 (a 1.2% contraction on account of the pandemic) and 2019-20 (6.4% because of exceptionally low inflation once again), it has been lower than 10% only four times since 2003-04.While there are still almost three months to go before the current fiscal year finishes on March 31 and the NSO will release a provisional estimate of 2025-26 GDP in the end of May, what makes the first advance estimates keenly watched is the fact that they are the only full-year GDP estimates published before the union budget is presented. Nominal GDP is perhaps the most critical assumption in the entire budgetary math because it serves as a base for revenue and therefore deficit calculations.The nominal GDP growth of 8% in first advance estimates is significantly lower than the 10.1% value which was assumed in the 2025-26 Union Budget. But it does not mean the revenue, and hence, deficit projections of the budget will fall short because a comparison of absolute values from NSO’s estimates and the budget’s numbers suggests that this is unlikely to be the case. The 2025-26 Union Budget assumed an absolute nominal GDP of ₹356.97 lakh crore. NSO’s latest data projects nominal GDP for 2025-26 at ₹357.13 lakh crore which is more, not less than the amount the budget assumed. This means that barring possible revenue headwinds from the Goods and Services Tax (GST) rationalization, the budgetary math and the fiscal deficit target should not be compromised.“These advance estimates are largely a pre-budgetary exercise, based on extrapolations of indicators available only up to November, and are therefore prone to revision. Moreover, with the release of the new GDP series in February (incorporating base-year changes and other technical adjustments), one should brace for potentially significant revisions to past trends. That said, on the statistical front, FY27 is likely to see the fading of one-off GDP deflator effects that distorted FY26 numbers. This, along with other macro factors, should take real GDP growth closer to ~6.5%, while lifting nominal growth back towards ~10% ( using the existing GDP series),” said Madhavi Arora, chief economist, Emkay Global.