India's economy is projected to grow at 7.4% in the fiscal year 2025-26, according to the first advance estimates released by the National Statistics Office (NSO). This figure, which exceeds the 6.5% growth recorded in FY25, highlights the country's economic resilience amid global headwinds. The robust growth is fueled by the strong performance of the services and manufacturing sectors, coupled with increased government expenditure and capital formation.

However, a closer look reveals a potential challenge: tax revenue. While the projected real GDP growth appears promising, nominal GDP growth, which factors in inflation, is estimated at 8%. This is notably lower than the 10.1% assumed in the FY26 budget. This moderation in nominal GDP growth, along with income tax and GST cuts, is affecting tax collections. In the first eight months of the current fiscal year, New Delhi’s net tax intake didn't even reach half of what it expects to collect by March 31. Experts estimate a potential revenue shortfall of ₹1.5-2 trillion.

The discrepancy between the real GDP growth and tax revenue figures raises concerns about the accuracy of the economic data and the effectiveness of the government's fiscal policies. Tax collection figures are hard numbers, whereas gross domestic product is a statistical artifact. Some economists suggest that the impact of price changes is perhaps not being captured correctly in official data.

Despite these concerns, there is optimism that the government will meet its fiscal deficit target of 4.4% of GDP for FY26. This could be achieved through expenditure rationalization, higher dividends from the Reserve Bank of India (RBI), and increased non-tax revenues.

Several factors contribute to the projected 7.4% GDP growth. The services sector is expected to grow by 9.1% in FY26, compared to 7.2% in the previous year. Manufacturing growth is also expected to rise to 7%, up from 4.5%. Furthermore, gross fixed capital formation, which includes investments in machinery, factories, and infrastructure, is projected to expand by 7.8%.

The Indian economy's growth has been strong, averaging around 8.2% annually up to FY25 since the pandemic-induced contraction in FY21. The RBI had earlier projected a 7.3% real GDP growth for FY26, citing strong industrial output, healthy agricultural performance, robust rural demand, and recovering urban consumption.

Looking ahead, the United Nations projects India's GDP growth to moderate to 6.6% in 2026 before slightly increasing to 6.7% in 2027. This outlook is supported by resilient consumption, strong public investment, tax reforms, and monetary easing.

The upcoming Union Budget is expected to focus on continuity and implementation rather than major reforms, particularly with the new Income Tax Act coming into effect in April 2026. While there may be limited scope for significant tax changes, attention will likely be directed towards improving tax compliance and streamlining payroll systems. The government is expected to release a new GDP series with a 2022-23 base year on February 27, which may address some of the methodological concerns and provide a more accurate picture of the economy.