R. Suryamurthy
India’s 7.6 per cent real GDP growth in FY26, as per the Second Advance Estimates released under the rebased national accounts with 2022–23 as the base year, is being widely read as confirmation of macroeconomic strength. In a global environment where most large economies are struggling to sustain even 3 per cent growth, such a number commands attention. Yet, a rigorous reading of the data suggests that this expansion is being driven by a shrinking set of sectors, a rising dependence on capital formation, and a weakening consumption and rural income base, making the growth trajectory far more fragile than the aggregate suggests.
The estimates, released by the Government of India through the Ministry of Statistics and Programme Implementation (MoSPI) and the National Statistics Office (NSO), reveal not just how fast the economy is growing, but how unevenly that growth is being produced and distributed. And it is this unevenness — not the headline number — that should be the focus of policy concern.
Rebasing GDP to 2022–23 has done more than update weights; it has reshaped the architecture of India’s growth narrative. Under the revised series, Gross Fixed Capital Formation (GFCF) is estimated at 31.7 per cent of GDP, among the highest ratios seen since the mid-2000s. By contrast, Private Final Consumption Expenditure (PFCE) now accounts for just 56.7 per cent of GDP, down sharply from the 58–60 per cent range seen consistently under the previous series.
This shift is not trivial. In a $3.5-trillion economy, a 1 percentage-point change in the consumption share represents demand worth over ₹3.5 lakh crore. The new series therefore implies that India’s growth engine is now far more dependent on investment momentum than on household purchasing power, a configuration that historically has proven less resilient in the face of shocks.
Equally revealing is the fact that GVA growth has exceeded GDP growth in both FY25 and FY26. In FY26, while real GDP grew 7.6 per cent, real GVA grew 7.7 per cent, implying a negative contribution from net indirect taxes. In absolute terms, this suggests that tax growth has lagged output growth despite nominal GDP expanding by 8.6 per cent. This weak tax–growth linkage undermines the assumption that high GDP growth automatically translates into stronger fiscal capacity.
Manufacturing has emerged as the undisputed driver of FY26 growth, expanding by 11.5 per cent in real terms and contributing the largest share to incremental GVA. Over the past three years, manufacturing GVA has grown at an average annual rate of about 11.1 per cent, compared to overall GVA growth of around 7.3 per cent.
However, the employment and demand implications of this surge remain limited. Manufacturing today accounts for less than 18 per cent of total employment, while absorbing a disproportionately high share of incremental capital. The implied capital–output ratio of manufacturing has risen, indicating that each unit of output growth is being generated with less labour intensity than in earlier industrial phases.
Moreover, the rebound is uneven. While core industries and large corporate manufacturers have benefited from infrastructure spending and balance-sheet repair, MSME-linked manufacturing remains constrained, as reflected in modest credit growth to smaller enterprises relative to large firms. Without a parallel rise in mass consumption, manufacturing growth of this scale risks becoming self-limiting, as capacity addition outpaces demand.
In contrast to manufacturing, construction growth has slowed to 7.1 per cent in FY26, down from near double-digit rates immediately after the pandemic. This matters disproportionately because construction absorbs over 13 per cent of India’s workforce and is among the most employment-elastic sectors in the economy.
The slowdown coincides with a shift in housing demand toward mid-range and premium segments, while affordable housing — which accounts for the bulk of employment generation — has weakened. The macro consequence is visible: despite strong GDP growth, employment growth remains subdued, and income gains among migrant and informal workers remain limited.
In an economy where consumption accounts for over half of GDP, this deceleration in an employment-heavy sector acts as a direct brake on demand expansion.
The most troubling numbers in the FY26 estimates relate to agriculture. Agriculture and allied activities grew just 2.4 per cent in FY26, compared to 7.6 per cent GDP growth and 11.5 per cent manufacturing growth. In Q3 FY26 — the festive quarter — agricultural growth fell further to around 1.4 per cent, while overall GDP expanded 7.8 per cent.
With over 40 per cent of the workforce dependent on agriculture, this divergence is economically destabilising. Even assuming population growth of roughly 1 per cent, real per-worker income growth in agriculture remains close to 1–1.5 per cent, insufficient to drive meaningful consumption growth.
This helps explain why, despite PFCE growing 7.7 per cent in FY26, rural consumption indicators continue to lag urban demand. The recovery in consumption is real, but it is concentrated among salaried, urban households, not farm-dependent ones.
Services GVA grew 9.0 per cent in FY26, providing stability to overall growth. Within services: Trade, transport, hotels and communication grew over 10 per cent. Financial, real estate and professional services also expanded close to 10 per cent.
However, public administration and defence grew significantly slower, reflecting subdued state-level spending. This matters because state expenditure traditionally plays a counter-cyclical role, especially in supporting rural and semi-urban demand. Its weakness leaves growth increasingly dependent on private-sector confidence and urban credit cycles.
One of the headline positives of FY26 is the compression of the real–nominal GDP growth wedge to about 1 percentage point, compared to 3–4 percentage points in earlier years. While this reflects moderating inflation, it also implies weaker nominal income growth, especially in sectors already facing real growth constraints such as agriculture and construction.
Projections suggest that this wedge could widen again to around 3 percentage points in FY27, meaning inflation may rise even as real growth moderates — a combination that would further squeeze real incomes at the bottom of the distribution.
Most forecasts place FY27 growth between 7 and 7.5 per cent. Achieving this would require: Manufacturing growth to remain above 9–10 per cent; Services to sustain high single-digit expansion; and Agriculture to improve meaningfully from 2.4 per cent.
Without a rebound in agriculture and construction — sectors that together employ over half the workforce — growth will remain capital-heavy, urban-centred, and demand-constrained. Such growth can persist for a time, but it lacks the internal consumption engine required for long-term stability.
India’s FY26 growth is genuine. But it is also statistically concentrated and economically narrow. Manufacturing and services are expanding rapidly, but agriculture, construction and rural incomes are not keeping pace. Consumption growth exists, but it is unevenly distributed, while investment increasingly substitutes for demand rather than responding to it.
History suggests that growth models built on such asymmetries eventually confront their limits. Unless output expansion reconnects with employment, income growth and rural demand, India risks sustaining impressive GDP numbers that rest on a progressively thinner base. High growth is an achievement. Broad growth is a necessity. (IPA Service)
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