India's GDP growth rises to four-year high of 7.7% in FY26, driven by services and manufacturing: SBI Caps

India's economy expanded at its fastest pace in four years during FY26 with real GDP growth accelerating to 7.7% year-on-year and real Gross Value Added (GVA) rising 7.9%, according to a report by SBI Caps. 

The report stated that real GDP growth was revised upward by 10 basis points from the Second Advance Estimates (SAE) while real GVA was revised higher by 20 basis points. Despite global and domestic headwinds during the fiscal year, the economy delivered broad-based growth across key sectors. 

In nominal terms, GDP for FY26 is estimated at ₹346.4 lakh crore, marginally higher than the SAE estimate but below the First Advance Estimates (FAE). Nominal GDP growth stood at 8.9%, reflecting subdued inflation for much of the year. 

Services, manufacturing power growth 

The report highlighted that growth became more broad-based in FY26, with both the secondary and tertiary sectors expanding above their long-term trends. 

The services sector emerged as the key growth driver, posting a robust 9.3% increase in real GVA, up 140 basis points from the previous year. The performance was supported by a sharp recovery in trade, hotels and related services, which grew 11% on a low base. Financial services and real estate also maintained strong momentum, aided by another year of healthy profitability in the banking sector. 

Manufacturing and construction activity provided additional support to economic growth. The secondary sector expanded 8.8% during FY26, benefiting from a revival in manufacturing and sustained construction activity. This helped offset weakness in utilities, where subdued power demand weighed on growth. 

Meanwhile, the primary sector slowed due to lower mining output and moderation in agricultural activity. 

Capex push and GST rationalisation boost demand 

According to SBI Caps, government capital expenditure and GST rate rationalisation played a crucial role in supporting economic activity. 

Gross Fixed Capital Formation (GFCF), a key indicator of investment demand, grew 8.2% in FY26 as the Centre nearly met its revised capital expenditure target despite fiscal constraints. Investment activity gathered pace in the latter part of the year, with GFCF rising 10.8% in the fourth quarter. 

Private Final Consumption Expenditure (PFCE) also strengthened significantly, growing 7.7% during the year—190 basis points faster than the previous fiscal. The report attributed the improvement to GST rate rationalisation, which boosted consumer demand across several segments, particularly automobiles during the second half of FY26. 

Government consumption expenditure is expected to recover further in FY27 as policymakers increase welfare spending to support vulnerable sections of society, the report added. 

Strong fourth-quarter performance 

India's economy grew 7.8% year-on-year in the January-March quarter of FY26, helping cap a strong fiscal year despite disruptions in March. 

The services sector remained the principal growth engine in the quarter, expanding 9.9%. Financial services, real estate, trade and hospitality recorded double-digit growth, reflecting strong economic momentum. 

Manufacturing growth moderated to 7.3% in the fourth quarter, its slowest pace since the second quarter of FY25. The report attributed the slowdown to production disruptions in sectors dependent on natural gas. However, it noted that the underlying drivers of manufacturing growth remain strong and normalisation of supply chains should support a recovery going forward. 

FY27 likely to be more challenging 

Looking ahead, SBI Caps expects growth to moderate in FY27 amid mounting global and domestic challenges. The report cited weaker global trade conditions and persistent external uncertainties as key risks to economic growth. It also warned that below-normal monsoon conditions could dampen rural sentiment, affecting both agricultural production and consumption demand. 

However, rising inflation is expected to push up the GDP deflator, supporting nominal GDP growth during FY27. Higher nominal growth could provide the government with additional fiscal flexibility to address economic challenges and support growth if required. 

While high-frequency indicators continue to show resilience in select segments of the economy, replicating FY26's strong growth performance may prove more difficult in the coming fiscal year, the report said.