Economy spurts 7.8% in Q1 FY26 as manufacturing, agri, services shine

India's GDP grew 7.8% in Q1 FY26, a five-quarter high led by manufacturing and services, though US tariffs pose risks to sustaining growth momentum

Beating forecasts, India’s economic growth accelerated to a five-quarter high of 7.8 per cent in the April-June 2025 period, driven by a sharp rise in manufacturing and services, defying expectations of a sequential slowdown indicated by high-frequency data. 

  Most economists, however, believe the punitive 50 per cent additional tariff imposed by the Donald Trump administration in the US will weigh on growth momentum for the rest of FY26. 

The Reserve Bank of India had projected gross domestic product (GDP) growth at 6.5 per cent for Q1FY26, while the most optimistic forecast came from the State Bank of India at 6.8–7 per cent. 

 

Nominal GDP in the June quarter grew at a slower pace of 8.8 per cent, compared with the finance ministry’s estimate of 10.1 per cent for full FY26. The gap reflected a sharp narrowing in the GDP deflator (1 per cent in Q1FY26 versus 3.4 per cent in Q4 FY25), due to softer retail and wholesale inflation. Since nominal growth is deflated by price indices to calculate real growth, weaker nominal expansion could complicate the government’s efforts to meet fiscal deficit and debt-to-GDP targets. 

Madan Sabnavis, chief economist at Bank of Baroda, said growth had been expected to remain buoyant, but the June quarter performance was “beyond expectations”. He added: “The economy does look poised to clock the growth rate of 6.5 per cent for the year, notwithstanding the tariff effects, which could affect growth by 0.2–0.4 percentage points. The low price deflator effect would also help in supporting the growth number.” 

Dipti Deshpande, principal economist at Crisil Ltd, said higher US tariffs and global uncertainties could weigh on domestic private investment this financial year.

 

“In the absence of a trade deal between India and the US, a few sectors will have to brace for a bigger impact, given the tariffs. Specifically, the micro, small and medium enterprises sector, which accounts for about 45 per cent of India’s total exports, faces formidable challenges,” she said. 

During the June quarter, the services sector expanded at an eight-quarter high of 9.3 per cent, led by public administration, defence and other services (9.8 per cent) and financial, real estate and professional services (9.5 per cent), despite a softening in credit growth. Trade, hotel, transport, communication and broadcasting services -- the largest component of the services sector --expanded 8.6 per cent, also marking an eight-quarter high. 

Manufacturing grew 7.7 per cent, a four-quarter high, helped by subdued input cost inflation. Growth in the labour-intensive construction sector slowed to a nine-quarter low of 7.6 per cent. Agriculture output expanded 3.7 per cent, more than double the rate in Q1FY25, supported by a good rabi season. 

After turning positive in the March quarter of FY25, net exports slipped back into negative territory in the June quarter of FY26 as imports surged 10.9 per cent, while overall exports (merchandise and services) rose 6.3 per cent, defying expectations of front-loaded merchandise shipments. 

On the supply side, private spending growth accelerated sequentially to 7 per cent in the June quarter, reflecting stronger rural demand, while government spending grew a robust 7.4 per cent on a low base. Investment demand, measured by gross fixed capital formation, remained healthy at 7.8 per cent, supported by strong government capital expenditure. 

“The outlook for private consumption is bolstered by developments such as income tax relief, a 100-basis-point rate cut, healthy progress of kharif sowing and the upcoming rationalisation of GST slabs, even as discretionary purchases by households could be deferred in Q2 until tax cuts are implemented during the festival season. Moreover, potential job losses in sectors affected by US tariffs could sour sentiment for some households,” said Aditi Nayar, chief economist at ICRA Ltd. 

Sujan Hajra, chief economist at Anand Rathi Wealth Limited, said that while the 50 per cent US tariff on Indian exports remains a key risk, India continues to stand out as the most compelling macroeconomic story in a gloomy global backdrop, with reforms gaining traction and inflation staying modest. “Growth for the full year is still likely to average around 6.5 per cent, even after factoring in tariff headwinds, while nominal GDP growth in the high single digits supports corporate earnings expansion of 11–13 per cent. India’s macro strength provides a robust foundation for the equity market outlook,” he added.