The Growth Surprise: Another blockbuster GDP print for India

India's economy has shown resilience despite tariffs and the West Asia conflict, with strong domestic demand, healthier balance sheets and investment supporting growth

Notwithstanding tariffs and the West Asia conflict, the Indian economy has officially averaged 8.2 per cent growth over the past four quarters. While the primary sectors, agriculture and mining, have lagged the headline rate, the secondary sectors — manufacturing, construction and utilities have expanded at par, and the tertiary sectors —  most services, public administration and defence — have outperformed it. Growth slowed to 7.8 per cent in the June quarter from 8.6 per cent in the March quarter but still exceeded expectations. When the quarter began, the outlook was clouded. Energy supplies were disrupted, the threat of US tariffs continued to cast a shadow over trade prospects, and a new risk was emerging on the horizon: the growing likelihood of an unfavourable monsoon. The intensity and implications of each of these risks shifted over the course of the quarter. 

They remain risks, but none has so far proved potent enough to derail the economy. If anything, India’s performance suggests a greater degree of resilience than initially anticipated. 

To be sure, the economy entered this financial year from a position of relative strength. The growth-inflation mix was healthy and there was fiscal room to manoeuvre. Other core strengths were already in place: a banking sector with low non-performing assets, healthier corporate balance sheets, steady domestic demand and continued government-led capital expenditure. Three factors stand out. Together, they explain not just what happened during the quarter, but also signal what is to come. 

The supply shock morphed into a price shock 

What initially appeared to be a crippling supply shock gradually became a manageable pricing challenge. As the economy diversified energy import sources, drew down inventories and policymakers rationed critical inputs, physical shortages eased. By the end of the quarter, much of the adjustment had shifted to prices, with the government, producers and consumers sharing the burden to varying degrees. Demand remained sufficiently strong to absorb price adjustments and output continued to expand. 

The Reserve Bank of India’s analysis of listed non-financial companies shows aggregate sales growth rose to 19.4 per cent in the first quarter from 13.9 per cent in the previous quarter, while manufacturing sales growth rose to 21.4 per cent from 14.5 per cent. Crisil’s assessment of more than 400 companies across 47 sectors tells a similar story. Revenue growth is estimated at 11-12 per cent in the first quarter, up from 9.6 per cent in the previous quarter, aided significantly by firms’ ability to raise prices without materially weakening demand. Automobiles, white goods, telecom services, power generation, and health care all saw robust demand. 

As the gap between producer and consumer prices remains wide, further price pass-through is likely wherever demand conditions permit. Where it does not, margins will come under pressure. Our calculations indicate that high cost-impact sectors account for around 17 per cent of gross value added, while moderate-impact sectors contribute another 39 per cent. 

Demand remains resilient, but challenges loom 

A second factor has been the persistence of domestic demand. Tax cuts have supported disposable incomes, while government transfers and infrastructure spending, combined with low inflation, have strengthened purchasing power. Monetary conditions have remained supportive of credit offtake, while soaring gold prices have provided households with an additional avenue for borrowing. 

The weak monsoon is likely to dent farm incomes to some extent. One poor rainfall season though need not undo the resilience rural India has built. However, if rainfall deficiencies deepen, weather anomalies persist and stress extends into the winter crop season, those buffers could weaken, placing broader pressure on incomes and demand. 

Exports, meanwhile, have performed better than expected. Despite uncertainty arising from tariff threats and slower global growth, export diversification and sector-specific tariff exemptions have thus far helped sustain momentum. 

Strong starting conditions support investment 

Businesses entered this phase with lower leverage and stronger balance sheets than during previous shock episodes. Robust domestic demand has pushed manufacturing capacity utilisation above 77 per cent, improved corporate confidence and enhanced the sector’s ability to absorb temporary margin pressures. 

While the government’s role in driving investment remains the mainstay, there are signs that private sector investment is gathering momentum in select pockets. According to Crisil Ratings, merger and acquisition activity has remained robust, with deal volumes doubling since FY17. Notably, investment has been the only demand-side component to grow faster than GDP over the past four quarters. 

That said, global uncertainty and recurring supply chain disruptions continue to constrain a broad-based revival in private corporate investment. 

Reflecting the strong first-quarter performance and encouraging early signals from the second quarter, we have raised our FY27 GDP growth forecast to 7.0 per cent from 6.6 per cent. Even so, risks from a below-normal monsoon and an uncertain global environment continue to warrant caution.

The author is principal economist and senior director at Crisil Limited. Views are personal