Beating the odds

The National Accounts data for the first quarter of this financial year (April-June 2026), released by the Ministry of Statistics and Programme Implementation on Monday, showed that the Indian economy remained on a strong growth path. Gross domestic product (GDP) at constant prices increased 7.8 per cent during the quarter, as against 6.9 per cent in the same quarter last year. It must be noted that this was the first full quarter since the beginning of the Iran war. Clearly, the impact of the war has not been as significant as many expected in the initial days. It is worth noting that India imports most of its crude oil and gas requirement, and the supply of some energy components was disrupted, at least in the initial days of the crisis. Given the disruption owing to the crisis in West Asia, it is reasonable to argue that the economy was managed well during this period. Gross value added, the preferred indicator of economic activities, expanded 8.2 per cent during the quarter.

 

Headline growth was supported by robust performance in the secondary and tertiary sectors. In the secondary sector, manufacturing expanded 9.2 per cent during the quarter, as against 8.3 per cent in the same period last year. The construction sector also recovered to expand 7.7 per cent, compared to 5.2 per cent last year. The tertiary sector expanded 10 per cent as against 8 per cent in the comparable period last year. The primary sector, however, underperformed with the agriculture and allied sectors growing 3.6 per cent, against 4.4 per cent in the comparable quarter last year. Agricultural growth may remain subdued this year owing to a below-normal monsoon. Mining and quarrying witnessed a contraction. The data from the expenditure side showed that private final consumption expenditure increased 7.1 per cent during the quarter, an improvement over the previous year but below the headline rate. However, the investment component performed well, showing an expansion of 11.9 per cent, compared to 5.8 per cent in the same quarter last year. The share of capital formation in GDP also increased to 34.3 per cent (current prices). It will be worth watching if growth in capital formation is broadbased and can be sustained in the coming quarters, which will help support growth.

 

Economists argued that growth was supported by factors such as direct-tax relief and a reduction in rates of goods and services tax last year. Monetary policy too was supportive. However, the impact of some of these interventions will likely wane in the coming quarters. Inflation projections also suggest that interest rates may need to increase in the coming months. Strong growth numbers will only strengthen the case for increasing the policy rate. It is also worth noting that global uncertainties and tensions in West Asia have not completely abated and crude-oil prices remain elevated. Further, there are risks of significant tightening in global financial conditions in the coming months, which could affect capital flows and investment. All these factors could affect economic activity and growth in the next few quarters.

 

Thus, the economy will continue to need careful management. Notably, the pass-through of energy-price increases has been limited, and the government may also face a higher burden of fertiliser subsidies. Given higher potential demands on the Union Budget, it will be important that capital expenditure is not affected in the remainder of the financial year. This will be critical in sustaining the growth momentum. Overall, the first-quarter performance has been impressive. The challenge is to sustain the momentum.