MUMBAI: Economic growth has likely eased to 7.2% in Q3 from 8.2% in Q2 of FY26 due to a likely lower expansion in services at 7.8%, down from 9.2% in Q2, agriculture at 3% as against 3.5% in Q2 and a few other sectors, according to an analysis by Icra Ratings. This is likely to outweigh the pick-up in the performance of the industrial sector (six-quarter high of 8.3% as against 7.7% in Q2).
So far, this fiscal, the economy has grown by 8% -- 7.8% in Q1 and 8.2% in Q2. The government will release the Q3 GDP numbers on Saturday.
“An estimation of GDP growth with the new base year of 2024 is challenging at present. We have anchored the outlook for Q3 to the existing GDP dataset across the sectors of the economy, based on which we project the GDP growth to have eased to 7.2% in Q3 from 8% in the first half of the fiscal,” Aditi Nayar, the chief economist at Icra, said in a note.
The reasons for the estimated sequential slowdown include an unfavourable base effect, contraction in government capex, subdued revenue expenditure of states, and weak merchandise exports. Nevertheless, healthy demand during the festive season, boosted by GST rate cuts, likely kept the pace of growth above 7% in the said quarter, she added.
She estimates the annualized growth in the services gross value added to moderate to 7.8% in Q3 from 9.2% in Q2, dampened by lower expansion in government spending and services exports. After the frontloading seen in H1 (40%), the government’s capex contracted by 23.4%, albeit on a high base. In absolute terms, capex dipped to Rs. 2.1 trillion in Q3 from Rs 3.1 trillion in Q2.
In contrast, the available data for 24 states reveals that their aggregate capital outlay and net lending expanded by a robust 21.9% in Q3 after having contracted by 1.1% in Q2. The absolute capex for these states rose to Rs 2.1 trillion in Q3 from Rs 1.8 trillion in Q2, similar to the central capex level.
Taken together, the central and state capex declined by 5.7% to Rs 4.2 trillion in Q3 from Rs 4.4 trillion in Q3 2025, against the 16.7% growth recorded in Q2 2026.
Further, on an annualised basis, the Centre’s non-interest revenue expenditure narrowed to 3.5% from 11.2%. However, growth in the combined non-interest revenue expenditure of the aforementioned 24 states eased to 2.7% from 7.3%. Taken together, the central and state non-interest revenue spending inched up only by 0.3%.
Services exports eased slightly to a seven-quarter low of 7.5% in Q3 2026 to $111.2 billion from 8.7% in Q2 2026 at $101.6 billion, mainly due to an unfavourable base.
Notwithstanding a broadly favourable trend in kharif output, the GVA growth of agriculture, forestry and fishing may have moderated to 6% from 6.6%.
She sees the industrial GVA growth to record a broad-based improvement to a six-quarter high of 8.3% from 7.7%, supporting the overall expansion in the said quarter. As per the index of industrial production data, manufacturing output rose to a nine-quarter high of 6.2% in Q3 from 5.1%, reflecting the bump-up in production to cater to festive season demand, which was aided by reduction in GST rate, and re-stocking post the festive season, even though exports of some tariff-impacted sectors weighed on production.
The quarterly financial results of manufacturing companies revealed that the operating profit margin of the manufacturing sector remained healthy, albeit slightly lower than Q2, given the pressure from raw materials costs and the wage bill (likely stemming from the enforcement of the new labour codes).
Merchandise exports increased by a modest 1.7% on-year to $111 billion in Q3 2026, after a base effect surge in Q2 2026 when it grew 8.3% to $108 billion.
While petroleum shipments were down 5.9% owing to softening in crude prices, non-oil exports rose by 2.7% in the quarter. Exports of electronic goods rose 24.9%, drugs and pharmaceuticals rose 6.3%, and engineering goods rose 1.2%, whereas those for gems and jewellery (-5.8%), chemicals (-3.2%), rice (-25.9%), and cotton yarn/fabric (-4.9%) shipments contracted, partly impacted by the steep 50% US tariffs that were in place during the quarter.