Editorial 2: ​War Clouds

Context

Despite Maduro’s flaws, the U.S. must pull back from its aggressive course in Venezuela.

Introduction

India’s latest GDP surge to 8.2% in the September quarter offers brief comfort amid rising external risks. Strong manufacturing, services, and recovering private consumption signal resilience, even as a record trade deficit and tariff-driven volatility cast shadows. With a low GDP deflator inflating real growth and uneven sectoral momentum, the outlook remains cautiously balanced.

India’s Q2 Growth Snapshot

Headline Performance

• India’s September-quarter GDP surged to 8.2%, beating forecasts and topping 7.8% in Q1 FY26.
• Growth is notably stronger than the same period last year, giving temporary relief to policymakers.
• This comes right after a record trade deficit of $41.68 bn in October, partly fuelled by a threefold jump in bullion imports, hinting at rising economic anxiety.

Drivers of Growth

• Strong momentum from manufacturing (9.1%) and services (9.2%).
• Private consumption recovered sharply: PFCE up 7.9% in Q2 FY26 vs 6.4% a year ago.
• Government spending added a mild push.
• Together, these show a broad domestic revival despite global challenges.

Caveats & Distortions

• The U.S. “two-stage” tariff action on India landed mid-quarter; exporters may have front-loaded orders, temporarily boosting output.
• Retail inflation at 0.25% (lowest in India’s CPI series) created a GDP deflator below 1%, artificially widening the gap between nominal (8.7%) and real GDP (8.2%).
• If inflation, commodity prices or oil costs rise — especially as India shifts from Russian crude — growth may moderate.
• The upcoming RBI MPC decision remains a major uncertainty.

Sectoral Patterns

• Construction rose 7.2%, signalling strong infra-linked activity.
• Financial, real estate & professional services grew 10.2%, reflecting capital-intensive expansion.
• Monthly indicators echo this: IIP up 4% in September; steel (14.1%) and cement (5.3%) show robust capital-goods demand.
• This aligns with the RBI’s three repo rate cuts in 2025, bringing the policy rate to 5.5% in June.

Underlying Weaknesses

• Growth is uneven, led by formal, high-skill, capital-heavy sectors like banking and tech.
• Labour-intensive, export-linked industries remain weak.
• Six months of IIP trends highlight soft rural consumption and stress in low-income segments.

Outlook

• Signals point to cautious optimism, not exuberance.
• The Q2 surge seems concentrated at the top end of the economy, while vulnerable sectors struggle.
• With trade data flashing warnings, sustaining this pace of growth may prove difficult.

Conclusion

India’s Q2 growth is undeniably impressive, but its foundations are uneven and partly inflated by anomalies such as ultra-low inflation and front-loaded exports. Strength in capital-intensive sectors contrasts with weakness in labour-intensive and rural segments. With trade pressures, possible inflation firming, and upcoming RBI decisions, sustaining this pace will require stabilising demand and broadening the base of growth.