R. Suryamurthy
India’s economy grew faster than expected in the April–June quarter of FY26, underscoring its resilience at a time when external shocks and domestic policy shifts threaten to complicate the outlook.
The National Statistics Office reported that GDP expanded 7.8% year-on-year in Q1, up from 6.5% a year earlier, marking the strongest quarterly performance in five quarters. Nominal growth came in at 8.8%, reflecting the role of softer deflators in boosting real growth.
The expansion was broad-based. Manufacturing, the economy’s bellwether, rose 7.7%, despite sluggish industrial output, as higher corporate profitability lifted value added. Construction climbed 7.6%, buoyed by government spending and robust housing demand in a lower interest-rate environment. Services were the standout: trade and hospitality surged 8.6%, financial services grew 9.5%, and public administration expanded nearly 10%. Agriculture managed a modest 3.7%, reflecting the tail end of the rabi harvest.
“This growth is heartening, not only because it beat expectations but also because it is broad-based,” said Madan Sabnavis, chief economist at Bank of Baroda. “The low price deflators helped, but even in nominal terms, consumption and investment expanded healthily.” He warned, however, that the impact of US tariffs could shave 0.2–0.4 percentage points off annual growth.
Economists broadly agreed that the first quarter’s strength provides a cushion, but most were cautious about the months ahead. Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, noted: “The upside to our earlier 6.2% full-year estimate is clear. Yet we remain cautious given the expected slowdown in exports due to higher tariffs and deferred production ahead of GST rate cuts.”
The tariff risk is indeed real. The US’s decision to slap a 50% levy on Indian exports this month threatens to hit sectors from textiles to engineering goods. While the share of exports in GDP held steady at 20.9%, indicating no frontloading before the tariffs, the coming quarters will reveal the damage.
Joe Maher, assistant economist at Capital Economics, said the economy is still “on course to expand by a world-beating 7% this year,” but growth will inevitably slow. “The punitive US tariffs will bite, though GST cuts and a weaker rupee should cushion the blow,” he said, pointing to the currency’s slide to a record ₹88.2 per dollar.
Domestically, consumption has shown resilience. Private final consumption expenditure rose 7% in real terms, while government spending bounced back, expanding 7.4% after last year’s contraction. Investment, as measured by gross fixed capital formation, climbed 7.8%, signaling underlying confidence despite policy uncertainty.
Still, the strength may be temporary. Aditi Nayar of ICRA warned that capex momentum is likely to ease as government spending moderates and tariffs weigh on exports. “The robust first quarter does not change our baseline FY26 growth forecast of 6.0%,” she said. “GST rationalisation and income tax relief should support consumption, but tariff-linked job losses could sour household sentiment.”
The data also raises questions for monetary policy. With growth stronger than anticipated and deflators holding inflation down, expectations of a rate cut in October are fading. “The stronger print has doused speculation that tariff-related uncertainty might push the RBI toward easing,” Nayar added.
For now, India’s economy looks sturdier than feared, propelled by services, investment, and public spending. But as external shocks converge with domestic adjustments, the coming quarters will test whether this momentum can be sustained—or whether the Q1 surge will prove a high-water mark before growth slows back toward the 6–6.5% range most forecasters still expect for the full year.