Strong macro show takes shape in Q2 before festive rush

New Delhi: India's economy ended the second quarter of fiscal 2027 on a strong footing with several high-frequency indicators pointing to robust growth in September. Economists expect the momentum to continue, with the festive season providing further impetus to economic activity in the coming months.

Goods and services tax collections rose 14.7% on-year to ₹2.04 lakh crore in September, aided by domestic consumption and strong growth in revenue from imports. Collections remained above the ₹2 lakh crore mark for the third consecutive month. The steady growth in domestic collections, despite geopolitical tensions, and festive season are likely to support GST revenue over next three months, said tax experts.

Also read: India's manufacturing PMI hits 7-month high in September as domestic, export demand strengthen


Car sales recorded strong double-digit growth, with estimates suggesting a 21% year-on-year increase to 460,000 units last month as automakers ramped up dispatches to meet anticipated festive-season demand.

Transaction volumes on UPI grew 22.6% from a year earlier to 24.07 billion, while transaction value increased 18%.

Transaction volumes, however, were slightly lower than the record levels seen in August as the payments ecosystem adjusts to upcoming changes in the merchant discount rate framework.

Manufacturing activity also remained robust, with strong domestic and international demand driving growth in new orders and output. The HSBC Purchasing Managers Index rose to a seven-month high of 55.1 in September from 52.8 in August. A reading above 50 indicates expansion in economic activity.

Also read: India factory activity rebounds sharply in September as demand revives, PMI hits 7-month high

Challenges in drawing capital

Power demand remained strong, increasing 11.3% from September last year, driven by higher cooling and irrigation demand amid a deficit monsoon.

Separately, the finance ministry's monthly economic review projected 7.3% gross domestic product growth in the July-September quarter, above the Reserve Bank of India's forecast of 6.4%.

However, it cautioned that India, like other developing economies, faces challenges in attracting capital flows as near-term uncertainties surrounding US trade relations, crude price spikes and the lack of India-specific opportunity in global artificial intelligence developments could weigh on the country's investment attractiveness.

Risks to growth include persistent geopolitical tensions, high energy prices, rising inflationary pressures, trade policy uncertainty and weather-related disruptions, said Rajani Sinha, chief economist at CareEdge Ratings.

GST collections

Gross GST collections from domestic activities in September rose 10.1% to about Rs 1.38 lakh crore, while revenue from imports increased 26% to Rs 65,525 crore.

"With the festive season, which typically leads to higher consumption across product categories, likely to continue for the next three months, it is expected that the GST collections would continue to be robust and could lead to the annual targets being exceeded in financial year 2026-27," said MS Mani, partner - direct tax, at Deloitte India.

The large manufacturing and consuming states such as Maharashtra, Gujarat, Uttar Pradesh, Telangana and Karnataka recorded GST collection growth exceeding 15%. Haryana (2%) and West Bengal (6%) posted slow growth, while Rajasthan recorded flat collections and Tamil Nadu reported a 5% fall, he said.

According to experts, the sharp increase in import-linked collections need closer examination, including the mix of raw materials and finished goods and the impact of higher landed costs.

"Gross GST collections growing 14.7% in September despite global headwinds is very encouraging. As import GST is up nearly 26%, it's important to see how much of that is raw materials versus finished goods," said Abhishek Jain, indirect tax head and partner, KPMG.

As the import component provided a boost to collections, experts cautioned that this should not be viewed entirely as a proxy for stronger domestic consumption.

"Domestic revenues grew 10.1% compared with almost 26% growth in import GST. This suggests a meaningful part of the headline buoyancy is coming from imports," said Pratik Jain, partner, Price Waterhouse & Co LLP.

Several factors are fuelling import-linked revenue, including the rupee's depreciation, elevated crude and commodity prices and inflated import bills, experts said.

"Rupee depreciation has increased the landed rupee value of dollar-denominated imports, while elevated crude and commodity prices have pushed up the overall import bill and, consequently, the GST base," said Manoj Mishra, partner and tax controversy management leader at Grant Thornton Bharat.

"Geopolitical tensions and supply-chain disruptions have also led to sourcing shifts and higher landed costs, particularly across energy and key industrial inputs," he said, adding that electronics, machinery, gold and fertilisers contributed to the increase.

The peak festive season that begins this month will provide a better reading on domestic consumption trends, experts said.

Net GST collections rose 18.1% to 1,76,520 crore after refunds. Total refunds fell 3% to 27,001 crore in September, while cumulative refunds during the April-September period rose 18.8% to 1.53 lakh crore.

"Cumulative refunds are up nearly 19%, which is a positive signal for businesses from a liquidity standpoint. Sustained domestic growth will be important to watch from here," Price Waterhouse's Jain said.

The September numbers come ahead of the GST Council's October 7 meeting, nearly a year after its previous meeting and after a year of changes to the GST rate structure. The council is expected to consider issues including input-tax credit restrictions, refunds and compliance.

"If the council can translate GST 2.0 into meaningful process reforms around ITC (input tax credit), registration, refunds and compliance, it could strengthen the quality of revenue growth by reducing friction for compliant businesses and improving tax efficiency," said Mishra of Grant Thornton.