Despite IMF Cut, Economy Seen Strong in Q2 on GST Boost

The domestic economy remained stable and resilient through the first half FY26, supported by easing inflation, firm consumption demand and policy measures including rationalisation of goods and services tax (GST) rates, reports from the Department of Economic Affairs showed. 

The projection comes even as the International Monetary Fund (IMF) pushed back India’s timeline to become a $5-trillion economy to FY29, a year later than previously projected.

The official GDP print for the September quarter is due Friday. In the previous quarter, India's GDP expanded by a stronger-than-expected 7.8%. The Monthly Economic Review for October points to another quarter of resilient growth for the economy, noting the strength in India’s financial markets in October. “Various independent assessments place real GDP growth for Q2 FY26 (July–September) in the range of 7.0–7.5%,” it said, “indicating continued strength in underlying economic activity.”

However, the government report also noted that the external environment remained uncertain, characterised by heightened worries over global trade policies. It highlighted mixed capital inflows owing to global headwinds as having contributed to continued pressure on the rupee. Interestingly, the sharper than expected depreciation of the rupee was singled out by the IMF as one of the key reasons for delaying India’s $5 trillion economy timeline.

GST Rationalisation Boosts Consumption

The report noted the boost given to economic activity and consumption by the recent cuts under the GST regime, adding that e-way bill generation rose 14.4% year-on-year during September and October. Meanwhile, cumulative GST collections grew 9% in April–October, while October collections were up 4.6% on year, signalling a resilient underlying revenue stream driven by consumption and improved compliance.

On the production front, manufacturing activity continued to expand, with the Manufacturing Purchasing Managers’ Index, which reflects an evaluation of the ‘mood’ of key decision-makers in companies, rising to 59.2 in October from 57.5 a month earlier. A PMI reading above 50 indicates bullishness and expectations of growth in business activity.

“This [PMI] increase was driven by GST relief, productivity enhancements and investments in technology,” the report said.

Easing Price Pressures Creates Room For Rate Cuts

The report highlighted that easing price pressures were driven by reduced GST rates, favourable base effects and sustained deflation in key food items. Retail inflation dropped to a record low of 0.25% in October, while core inflation held steady at 4.3%, signalling stable demand conditions. 

October marked the third consecutive month that the Consumer Price Index (CPI) remained below the Reserve Bank of India’s lower tolerance threshold of 2–6%, creating space for the MPC to consider further policy easing.

"The Monetary Policy Committee (MPC), noting the marked easing in headline inflation, has revised its inflation projection for 2025–26 to 2.6%. This reflects confidence that inflation will remain well-anchored, contingent on normal weather patterns and the absence of supply-side disruptions," the report said.

The rate-setting panel is scheduled to meet for its final monetary policy review of the year between December 3–5. Market expectations remain divided, with a majority anticipating a 25 basis point rate cut and others expecting the central bank to hold rates steady.

However, the fall in inflation may not be actually supportive of growth targets. A low inflation typically leads to a slower than expected expansion of nominal GDP, which is calculated without taking into account the rate of inflation. Slowing nominal GDP growth has been highlighted as another major factor by the IMF for pushing back the $5 trillion target. The IMF has reduced the nominal GDP growth projection for FY26 to 8.5% from its previous projection of 11% made in 2024. It now expects nominal GDP growth to be around 10.1% in FY27.

Nominal Growth Weakness Raises Fiscal Concerns

While real GDP indicators remain strong, nominal growth which does not adjust for inflation has slowed sharply. In Q1 FY26, nominal GDP growth fell to a three-quarter low of 8.8%, even as real GDP rose 7.8%, highlighting the narrowing gap between headline growth and value expansion.

The Economic Times cited a report by Union Bank analysis which projects that nominal growth may ease further to around 8% in Q2, down from 8.8% in Q1 and 8.3% a year earlier, with favourable base effects and a subdued deflator continuing to play a role. Slowing nominal GDP complicates fiscal calculations, as it implies weaker tax revenues; the government had assumed a 10.1% nominal GDP growth rate in the FY26 Union Budget.

India Still Will Not Achieve $5 Trillion GDP in FY28

As per the report by the IMF, India will cross the $4 trillion threshold in FY26 and is likely to reach $4.96 trillion in FY28, just shy of the $5 trillion threshold. Earlier in February, the IMF had projected India's GDP to hit $5.15 trillion in FY28.

India’s near-term macro resilience is clear, but the IMF’s delay in the $5-trillion timeline exposes structural tensions between strong real growth and slowing nominal growth.