Strong macro show takes shape in Q2 before festive rush

India's economy entered the third quarter of fiscal 2027 with a strong start in the second quarter, according to high-frequency indicators. Economists anticipate this trend to persist, with the upcoming festive season providing additional stimulus for economic growth in the coming months.

In September, Goods and Services Tax (GST) collections surged 14.7% year-on-year to ₹2.04 lakh crore, primarily driven by domestic consumption and strong import revenue growth. Collections remained above the ₹2 lakh crore mark for three consecutive months, indicating sustained momentum. Tax experts believe this upward trajectory will continue over the next three months, supported by the festive season and robust domestic demand.

Car sales experienced double-digit growth, with an estimated 21% year-on-year increase to 460,000 units in September. This surge in demand was fueled by automakers ramping up production to meet festive-season expectations. Transaction volumes on UPI grew 22.6% compared to the previous year, reaching 24.07 billion, while transaction value increased 18%.

However, transaction volumes slightly trailed the record levels observed in August, as the payments ecosystem adapts to upcoming changes in the merchant discount rate framework.

Manufacturing activity remained robust, with strong domestic and international demand boosting new orders and output. The HSBC Purchasing Managers Index reached a seven-month high of 55.1 in September, surpassing the 52.8 recorded in August, indicating expansion in economic activity.

Despite these positive indicators, challenges persist in attracting capital flows to India. Weak capital inflows could be exacerbated by factors such as geopolitical tensions, high energy prices, rising inflation, trade policy uncertainty, and weather-related disruptions. Rajani Sinha, chief economist at CareEdge Ratings, highlighted these risks in the finance ministry's monthly economic review, which projected 7.3% GDP growth for the July-September quarter, higher than the Reserve Bank of India's forecast of 6.4%.

The GST collections in September showcased a notable 10.1% increase from domestic activities to approximately Rs 1.38 lakh crore, while revenue from imports rose 26% to Rs 65,525 crore. Experts emphasize that the sharp increase in import-linked collections warrants closer examination, as it may not fully represent stronger domestic consumption.

Factors contributing to import-linked revenue growth include the rupee's depreciation, elevated crude and commodity prices, and heightened import bills. Geopolitical tensions and supply-chain disruptions have also led to sourcing shifts and higher landed costs, particularly in energy and key industrial inputs.