GDP growth slowdown: India’s growth story has lost some momentum after a strong first half of FY26. The moderation is real. It is also not, yet, a reason for alarm.
After expanding 8.2% in Q2 (July-September), the economy appears to have slowed in Q3 (October-December), helped in part by an unfavourable base effect and weaker readings in several high-frequency indicators. The more useful question is not whether growth has slowed. It has. The question is whether this is the start of a sharper downturn or a normal reset after an unusually strong run.
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India is also set to release a revamped gross domestic product (GDP) series with 2022-23 as the new base year on Friday. This marks the eighth major revision in the history of the country’s National Income Accounts. That will incorporate changes in production structures, price weights and sectoral composition. The revision may alter measured growth rates at the margin and complicate quarter-to-quarter comparisons. It will improve measurement. It may also briefly cloud interpretation.
In the first half of FY26, real GDP grew 8%, following 7.8% in Q1 and 8.2% in Q2. The National Statistics Office’s first advance estimates place full-year growth at 7.4%. If that holds, it would mark an improvement over FY25’s 6.5%. Quarterly growth, however, does not move in straight lines, and Q3 was always likely to face a tougher comparison with last year’s strong base.
Q3 growth indicators show moderation, not collapse
The high-frequency data supports the case for moderation.
Electricity demand, a useful proxy for industrial and commercial activity, registered a marginal sequential contraction of 0.2% in Q3. Steel consumption growth slowed to 4.6%. Merchandise exports lost momentum amid weak global trade conditions, though merchandise trade alone does not capture the external sector fully and services exports and net exports also matter for GDP. The manufacturing and services PMIs also eased sequentially. Activity is still expanding, but at a slower pace.
That is the broad pattern. It is not the whole picture.
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Construction and consumption resilience is still visible
Some sectors continued to show strength. Cement production rose 11.1% in Q3, up from 7.3% in Q2, pointing to sustained construction activity. Industrial growth is estimated at 8.3% in Q3, against 7.7% in Q2. Consumption proxies were also firm: two-wheeler and domestic passenger vehicle sales both grew 20.9% in Q3.
These numbers matter because they suggest that domestic demand did not weaken uniformly. They also explain why most forecasters expect moderation, not a sharp deceleration.
ICRA has projected Q3 GDP growth at around 7.2%, citing base effects, contraction in central government capital spending, subdued state government revenue expenditure, and weak merchandise exports. India Ratings has projected around 7%, while noting gross fixed capital formation may still grow about 7.5% year-on-year in Q3. Bank of Baroda has also projected growth above 7%, supported by improving consumption trends and new investment announcements.
The consensus is narrow: growth has softened, but a drop below 7% is not the base case.
Public capex slowdown is the main macro concern
This is where the concern becomes substantive.
Public capital expenditure has been a key growth driver in recent years. A 24.5% year-on-year decline in central capex in December 2025 is not a statistical footnote. It is a material drag. The key question is whether this reflects timing and back-loaded spending or a more durable fiscal restraint, because the answer changes how Q3 weakness should be read. Economists expect a renewed push in the final quarter to meet the revised FY26 capex target of Rs 10.9 trillion, but the Q3 hit is still significant.
If public capex remains uneven, the burden shifts back to private investment faster than is comfortable. That handover is not automatic.
Private investment outlook depends on demand and financing
India’s private corporate balance sheets are stronger than a decade ago, and banking sector stress has eased significantly. Those are important improvements. But private investment decisions are still driven by demand visibility and external conditions, and by credit availability and borrowing costs.
If merchandise exports remain weak and global trade stays subdued, firms may defer investment even with stronger domestic balance sheets. That is why Q3 data should be read not only as a growth print issue, but as a signal on investment conditions.
Gross fixed capital formation is still expected to expand. The question is whether that expansion can accelerate without a steadier public capex impulse.
Consumer demand is uneven across categories
There are signs of resilience in household demand, especially during the festive season. But the pattern is uneven.
Domestic air passenger traffic grew 1.87% in Q3. Petrol and diesel consumption growth slowed to 3.97% from 4.37% in Q2. Vehicle sales surged during the festive period, but part of that may reflect front-loading rather than a durable shift in household spending. It may also reflect stronger urban discretionary spending more than a broad-based rise in demand, which still depends on rural incomes and wage growth.
This does not negate the consumption recovery. It only cautions against over-reading one quarter’s festive strength. Consumption resilience, in any case, cannot be inferred from sales proxies alone without labour-market and wage signals.
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Services cooling matters more than the headline suggests
Sector-level indicators map more directly to gross value added, while headline GDP can also move with net indirect taxes. Agriculture and services are both expected to have grown more slowly in Q3 than in Q2. The services slowdown matters especially because services account for more than half of India’s gross value added and carried much of the growth momentum in the first half of FY26.
A cooler services quarter will show up in headline GDP quickly, even if industry and construction remain relatively firm.
India growth outlook still hinges on investment discipline
India remains among the fastest-growing major economies. Sustaining 8% growth, however, requires more than one strong half-year and more than favourable comparisons.
The immediate policy priority is clear: restore momentum in public capital expenditure in Q4 to smooth volatility and support private investment. The medium-term requirement is equally clear: stronger exports, better logistics and export competitiveness, faster private investment execution, and higher-quality state-level capex.
Q3 looks like a recalibration. Whether it stays that way will depend less on the headline growth print and more on what happens to capex, investment and external demand in the next two quarters.