What Happened
- ICRA (an affiliate of Moody's) has projected India's GDP growth to moderate to 7.2% year-on-year in Q3 FY2025-26 (October–December 2025), down from 8.2% in Q2 FY2025-26.
- Services sector growth is estimated to slow to 7.8% in Q3, compared to 9.2% in Q2.
- Agriculture sector growth is expected to ease to 3.0% from 3.5% in Q2.
- The industrial sector is expected to be the lone bright spot, projected to hit a six-quarter high of 8.3%, up from 7.7% in Q2.
- Key headwinds include: an unfavourable base effect, contraction in central government capital expenditure, subdued state government revenue expenditure, and weak merchandise exports.
- Festive season demand (boosted by GST rationalisation) and continued consumption momentum kept growth above 7%.
Static Topic Bridges
GDP and GVA: How India Measures Economic Growth
India measures economic output primarily through Gross Value Added (GVA) at basic prices, with GDP calculated as GVA plus net product taxes (product taxes minus subsidies). The National Statistical Office (NSO) shifted to this methodology in 2015, aligning with the UN's System of National Accounts (SNA 2008) and revising the base year to 2011-12. A further base year revision to 2022-23 is expected to be adopted by the NSO in 2026, which will update the structural weight of each sector in the overall calculation.
- GDP at Market Price = GVA at Basic Prices + Product Taxes − Product Subsidies
- Real GDP uses constant 2011-12 prices; Nominal GDP uses current prices
- NSO releases Advance Estimates (January), Revised Estimates (February), and quarterly GDP data
- Q3 of any fiscal year covers October–December
Connection to this news: The Q3 FY26 projection of 7.2% GDP growth is based on sectoral GVA estimates; the widening gap between industrial recovery and services/agriculture deceleration directly shapes the overall GDP print.
Government Capital Expenditure and Fiscal Multiplier
Capital expenditure (capex) by the central government refers to spending on long-term assets such as roads, railways, ports, and defence infrastructure. Capex has a high fiscal multiplier — that is, each rupee of government capital spending generates more than one rupee of additional economic output, because it stimulates private investment and creates construction-sector employment. When government capex contracts (due to election cycles, fiscal consolidation, or revenue shortfalls), it removes a key demand driver, weighing on GDP growth in the near term.
- Union Budget 2025-26 set capital expenditure at ₹11.21 lakh crore (3.1% of GDP)
- In Q3 FY26, central capex was lower year-on-year, partially a fiscal back-loading effect
- State-level revenue expenditure (spending on salaries, subsidies, welfare) was also subdued
- The fiscal multiplier for capital expenditure in India is estimated at 1.5–2.5× (RBI research)
Connection to this news: The contraction in government capital spending is one of the primary reasons ICRA expects Q3 growth to underperform — a recurring pattern when elections or fiscal constraints delay project disbursements in H1 of the fiscal year.
Services Sector: India's Growth Engine
Services is the largest contributor to India's GDP, accounting for approximately 55% of GVA. Sub-sectors include financial services, real estate, trade, hotels, transport, communication, broadcasting, and public administration. Services are also India's dominant export earner, with software services (IT-BPM) contributing around $200 billion in annual exports. In recent years, the services sector's high-growth trajectory has been the key driver behind India's position as the fastest-growing major economy.
- Services sector contributed approximately 55% of GVA in 2023-24
- IT-BPM exports: ~$227 billion in FY 2023-24
- Financial services and real estate (FIRE) are the fastest-growing sub-sectors within services
- Services Purchasing Managers' Index (PMI) — a key leading indicator — remained above 50 (expansion) through most of FY26
Connection to this news: The projected slowdown in services growth from 9.2% to 7.8% is significant because services is the largest sector; even a modest deceleration there outweighs the industrial pickup and drives the overall GDP moderation.
ICRA: Role of Credit Rating Agencies in Macroeconomic Forecasting
ICRA Limited (Investment Information and Credit Rating Agency of India) was established in 1991 and is an affiliate of Moody's Investors Service. Credit rating agencies in India — including ICRA, CRISIL (S&P affiliate), CARE, and India Ratings (Fitch affiliate) — are regulated by SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999. Beyond rating debt instruments, these agencies publish macroeconomic research and quarterly GDP forecasts that inform financial markets and policy discussions.
- ICRA incorporated: 1991; listed on BSE and NSE
- Regulated by: SEBI under CRA Regulations, 1999
- Moody's holds majority stake in ICRA
- Other major CRAs in India: CRISIL (SEBI-registered, S&P affiliate), CARE Ratings, India Ratings, Acuité Ratings
Connection to this news: ICRA's GDP growth projection of 7.2% for Q3 FY26 is a market-watched forecast; its methodology of estimating sectoral GVA growth from high-frequency indicators (IIP, PMI, tax receipts) makes it a credible early predictor ahead of NSO's official release.
Key Facts & Data
- Q3 FY26 GDP growth forecast (ICRA): 7.2%
- Q2 FY26 actual GDP growth: 8.2%
- Q3 FY26 services sector growth (ICRA estimate): 7.8% (vs. 9.2% in Q2)
- Q3 FY26 agriculture sector growth (ICRA estimate): 3.0% (vs. 3.5% in Q2)
- Q3 FY26 industrial sector growth (ICRA estimate): 8.3% — a six-quarter high
- India's base year for GDP calculation: 2011-12 (revision to 2022-23 expected in 2026)
- ICRA established: 1991; affiliate of Moody's; regulated by SEBI under CRA Regulations, 1999
- GDP = GVA at Basic Prices + Product Taxes − Product Subsidies
- Q3 of Indian fiscal year = October–December