India's Economy On Track For 6.5% Expansion, External Sector Faces Tariff Headwinds: Report

India's economy is expected to expand by around 6.5 per cent in FY26, reflecting steady domestic momentum, said the Bank of Baroda, noting that the escalating concerns over ongoing tariff negotiations pose a downside risk, with potential adverse effects on the external sector. These projections align with the Reserve Bank of India's (RBI) projections of 6.5 per cent, which were announced during the latest Monetary Policy Committee (MPC) meeting on August 6.

The growth outlook is supported by a strong start to the fiscal year, with GDP accelerating to 7.8 per cent in Q1FY26 from 6.5 per cent in the same period last year. 

Manufacturing, agriculture, and services sectors provided a significant boost, alongside reasonable traction in consumption demand. The report added that the upcoming festive season spending and a recovery in urban consumption are likely to further support growth.

Expectations of another RBI rate cut and potential fiscal support could also positively influence the economic trajectory, the report added. According to the official data, India's nominal GDP grew at an 8.8 per cent rate during the April-June quarter.

Sources in the Finance Ministry also said that the GDP growth figures reflect strengthening momentum in the economy, anchored by strong macroeconomic fundamentals. They noted that supply-side growth was driven by manufacturing, construction, and services, reflecting an all-around growth.

On the demand side, robust expansion in Private Final Consumption Expenditure (7.0 per cent) and Gross Fixed Capital Formation (7.8 per cent) underpinned performance, the sources said, adding that Private Final Consumption Expenditure's (PFCE) share in GDP rose to 60.3 per cent, the highest first-quarter level in 15 years.

The Government's capital expenditure also sustained the momentum in Gross Fixed Capital Formation's (GFCF) growth.

On the investment front, Central government capital expenditure posted a significant 30.1 per cent increase over the average of the past three years. Private investment sentiment also improved, with new investment announcements rising 3.3 times on a year-on-year basis in Q1.

Additionally, capacity utilisation remained high, signalling further growth in manufacturing ahead.

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