India’s economy continues to set the pace among major economies. Compared to the general expectation that the GDP growth would slow to around 6.6-6.7 per cent in the April-June quarter, it grew 7.8 per cent.
This is despite the global geopolitical tensions and US tariff-related uncertainty. Despite this stellar growth, analysts remain cautious on the outlook ahead and still expect the GDP to grow only around 6.5 per cent in the current financial year ending March 2026.
What’s behind the stronger-than-expected first-quarter GDP growth?
Multiple boosters led to the GDP hitting a five-quarter high. A sharp growth was seen in the manufacturing sector, while the services sector saw strong momentum too. The manufacturing sector grew at 7.7 per cent, and the services sector growth hit a two-year high of 9.3 per cent. The construction sector too saw a good 7.6 per cent growth during the quarter.
The government’s expenditure also sustained the GDP growth. In the same period a year ago, government capex had been subdued ahead of the general elections. This time around, the Centre as well as states frontloaded capex in the first quarter. The Gross Fixed Capital Formation recorded 7.8 per cent growth.
“Both the Centre and states have increasingly frontloaded their capital expenditure. This shows a stronger intent to push growth through improved implementation capacity and a focus on infrastructure-led recovery. Private investment, therefore, must catch up to sustain the momentum and translate public spending into durable growth,” said Soumya Kanti Ghosh, member of the 16th finance commission and group chief economic adviser at State Bank of India.
Exports growth also picked up year-on-year, as exporters may have pushed more shipments before the US administration’s 50 per cent import tariffs on Indian goods came into effect.
“A key positive was the pick up in the private final consumption expenditure, supported by the rationalisation of income tax slabs, easing food inflation, a favourable monsoon and RBI rate cuts,” pointed Rajani Sinha, chief economist at CareEdge Ratings.
However, things get cloudy as we look ahead. The steep 50 per cent tariffs announced by the US kicked in last week. It places India among the most tariffed nations globally, along with Brazil. That is going to hurt a wide range of exports from gems and jewellery to textiles, auto components and fisheries.
For instance, CRISIL expects revenue growth of India’s readymade garment industry to nearly halve year-on-year this year, while India’s natural diamond polishing industry is expected to face a steep 28-30 per cent decline in revenue this year. Shrimp export volumes, too, are seen falling 15-18 per cent this year.
Domestically, the government has announced plans to restructure the GST regime, which will include reducing the slabs, and that is expected to reduce GST rates on a wide range of consumption items, which should boost consumer demand.
However, that boost is only expected from the third quarter, and the July-September quarter is likely to remain subdued from a manufacturing as well as demand perspective, with manufacturers and consumers preferring to wait and watch.
“While FY26 may see some buffers from consumption due to the impending GST rationalisation, the second quarter is likely to be a washout for manufacturing and consumption, as both producers and consumers delay manufacturing/ purchases ahead of the GST rationalisation. The US tariff hit will feed through to exports with a domino effect on employment, wages, and private consumption,” noted Madhavi Arora, lead economist at Emkay Global Financial Services.
Arora sees India’s GDP growing 6.5 per cent in the current financial year, compared with 6 per cent earlier.
Sinha of CareEdge also expects a 6.5 per cent GDP growth this year. However, that’s in a scenario where the secondary 25 per cent tariffs imposed by the US will be removed post negotiations and tariffs settle at 25 per cent. However, if the 50 per cent tariff persists, then there is a risk of growth falling to 6 per cent, said Sinha.
“Given that the global trade scenario remains uncertain, domestic demand-enabling measures by the government would be critical in the coming quarters,” she said.
Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, too, expects some policy intervention to help offset the adverse impact of the tariff hike on exporters.
“The sharply higher than expected first quarter GDP data provides a reasonable upside to our earlier full year estimates of 6.2 per cent. However, we remain fairly cautious on the way ahead amid expected slowdown in exports from higher tariffs, along with deferring production ahead of GST rate cuts,” she said.
Crisil is also expecting India’s GDP to grow around 6.5 per cent, with downside risks from the US tariff hike this year.