India’s economy ended FY26 on a strong note, with GDP growth accelerating to at least a 12-quarter high of 7.7%. The growth print was much higher than economists' expectations of 7.2-7.3%, and fired on many cylinders, from agriculture to private investment, and trade. However, all these silver linings that held up strong during the quarter despite war-led disruptions are facing a gloomy outlook exacerbated by the possibility of a below-normal monsoon. Mint explores what worked for the economy in Q4FY26 and where the risks lie for FY27.
The divergence
In the fourth quarter, gross fixed capital formation (GFCF), a measure of investment in the economy, grew 10.8% year-on-year, up from 8.2% in the previous quarter, recording highest growth reading in the new GDP series started in April-June 2023. The rise in investment is particularly significant as it came despite the moderation in central capex—generally an important driver of capital formation. The Centre reined in expenditure in the second half of the year to meet its fiscal deficit target, with capital expenditure contracting in both the December and March quarters.
With public capex weakening, economists believe the strength in capital formation suggests a greater role played by the private sector. "The strong GFCF print, despite the contraction in central government capex, suggests private sector investment likely picked up in Q4," Barclays said in a note after the GDP release. On the other hand, growth in private final consumption expenditure (PFCE) eased to 7.1% in Q4, its slowest pace in four quarters. With disruptions from the war continuing, both consumption (due to higher costs) and investments (due to a dimmer outlook) may be impacted and could fail to maintain Q4 momentum.
Offsetting growth
There were many shifts in growth across sectors in the March quarter. While investment gained momentum and consumption moderated on the expenditure side, services and agriculture strengthened, helping offset a slowdown in industry on the production side.
Services sector growth accelerated to 9.6% in Q4 from 7.8% in the previous quarter, led by trade, hotels, transport and communication activities. Agriculture, too, picked up pace, with growth rising to 3.6% from 1.7%, aided by a healthy rabi harvest. The gross value added (GVA) from industry, however, slowed to 4.5% from 6.4% in Q3. The moderation was driven largely by manufacturing, where growth fell sharply to 7.3% from 12.8% in the previous quarter.
In the coming quarters, agriculture faces major risks from the possibility of a below-normal monsoon this year. This, in turn, could lead to slower demand and higher prices, slowing manufacturing activity further down and halting the momentum of the services sector.
Trade gap
Trade became one of the surprising factors in Q4FY26, with net exports (exports minus imports) as a share of GDP rising to -1.4% from -2.7% in the previous quarter. The improvement came as a surprise to economists because a weaker currency and higher energy costs typically worsen the trade balance for an oil-importing economy such as India. However, what worked in terms of GDP calculation is a sharp decline in imports, mainly on the energy front from West Asia, and strong services exports. An extended timeline, however, reveals India’s vulnerability from trade as it exerted a much bigger drag in the full year FY26. Net exports deteriorated to -2.2% of GDP in FY26 from -1.8% in FY25 as tariff-related risks weighed on export momentum.
Going forward, the dynamics could turn negative for India as import bills are expected to surge on higher energy costs, along with spillover costs from other commodities, and higher shipping and insurance charges amid the ongoing war.
Price wedges
Higher commodity prices have already started weighing in on growth dynamics. For many sectors, such as mining, manufacturing, and public administration, higher prices began wedging higher gap between nominal and real GDP growth. Nominal GDP values in current market prices, while real GDP refers to inflation-adjusted prices. A higher gap suggests inflation played a major role in pulling real growth down. Currently, manufacturing remains the most sensitive to cost pressures. “The rise in input costs will impact the manufacturing sector more than services, as the former spends more on raw materials and fuels,” IDFC First Bank said in a recent note.
Mining and other industrial segments show a similar pattern, where commodity-linked price movements have widened the nominal-real divergence. At an aggregate level, rising wholesale and retail inflation are feeding into a higher nominal-real GDP gap, but the impact remains more pronounced in goods-producing sectors.
Weather watch
While war-related disruptions are expected to impact growth, the monsoon will be a key determinant of economic activity in FY27 as well. The growth in GVA from agriculture and allied activities recovered to 3.6% in Q4, from 1.7% in the preceding quarter, pushing up the full-year farm sector growth to 3% in FY26. The outlook, however, remains gloomy as the India Meteorological Department projected rainfall at 90% of the long-period average rainfall. This signals a greater risk to agricultural output. Data shows that in the years of rainfall falling short of normal by 10% or more, agricultural activity barely grew.
Analysts note that while the economy is less vulnerable to monsoon shocks than in the past, deficient rain could weigh on farm output, rural demand and inflation. All these risks were summed up by the Reserve Bank of India (RBI) in its latest growth outlook, projecting 6.6% GDP growth in FY27, significantly lower than 7.7% in FY26.