GDP growth blows past estimates, hits 5-quarter high of 7.8%

The Indian economy grew at a significantly better than expected 7.8% in the quarter ending June , the highest this number has been in five quarters, underlining strong domestic tailwinds to growth amidst growing external headwinds from US tariffs on Indian exports. While the latest GDP numbers will boost economic sentiment, they could also nudge the Reserve Bank of India to hold back on any further easing of interest rates in the near term even though inflation is expected to remain benign.

Industry, driven by a 7.7% growth in manufacturing and helped by a 7.6% growth in construction despite a double-digit growth last year managed to post an aggregate growth of 7%. (REUTERS)

“Despite the reciprocal penal tariff, we are maintaining our growth range (of 6.3%-6.8%) for full year,” chief economic adviser V Anantha Nageswaran said at a press conference after the data release.

Growing domestic consumption and strong economic fundamentals that earned India a sovereign debt ratings upgrade by S&P are reasons to be positive about the economy, Nageswaran said.

“High-frequency indicators for July 2025 indicate a carry-forward of Q1 economic momentum as domestic demand is expected to strengthen in the upcoming quarters with the onset of the festive period and forthcoming GST rate changes,” he added.

Higher kharif sowing supported by above-normal rainfall, comfortable buffer stocks and better output prospects for agriculture would keep food inflation benign, he added. “However, near-term risks to economic activity, principally exports and capital formation, remain due to tariff-related uncertainties,” Nageswaran added. He added that the 25 per cent penal tariff imposed by the US on Indian goods will be “short-lived”.

GDP growth increased for the third consecutive quarter in the first quarter of fiscal year 2025-26. The 7.8% growth is 43 basis points – one basis point is one hundredth of a percentage point – higher than the March quarter number and 1.3 percentage point higher than the 6.5% print in the June quarter of last fiscal year. The latest GDP growth number has also sprung a big positive surprise on analysts. A Bloomberg poll of economists expected growth to be 6.7%.

What explains the extraordinary growth in GDP in the June quarter?

From the production side, it is a result of all three sectors, agriculture, industry and services doing well. Agricultural growth was 3.7%, more than double the 1.5% growth a year ago. Industry, driven by a 7.7% growth in manufacturing and helped by a 7.6% growth in construction despite a double-digit growth last year managed to post an aggregate growth of 7%. Services, which account for more than 50% of the Gross Value Added (GVA, which strips out volatile indirect taxes and subsidies from the GDP number) grew at a massive 9.3%. Even net indirect taxes grew at a robust 10.3%.To be sure, high frequency data such as from the Purchasing Managers’ Indices for manufacturing and services has been suggesting a strong growth momentum in these sectors.

From the expenditure side, private final consumption expenditure (PFCE) posted a growth of 7% on top of the 8.3% growth in the June quarter last year. Gross fixed capital formation (GFCF) grew at 7.8% suggesting that government capex continues to drive economic momentum and even the private capex cycle could be showing signs of finally making a revival. Exports, however, lost growth momentum, growing at 6.3% compared to 8.3% a year ago. This is something which could become worse going forward unless the 50% tariffs imposed by the US – 25% base tariff along with 25% on account of Indian import of Russian crude oil while a bigger importer, China has not been penalized – are not removed. Because the US tariffs have only become effective from August, their impact on GDP data will not be known until November when the second quarter GDP numbers will be released.

It remains to be seen whether RBI makes an upward revision to its 2025-26 growth projection of 6.5% for the Indian economy in its next Monetary Policy Committee (MPC) meeting scheduled from 29 September to 1 October. Going forward, the economy will be dealing with both headwinds such as US tariffs on Indian exports – US is India’s largest export market and accounts for almost one-fifth of Indian exports – and tailwinds from the tax boost on account of lowering of income tax and now GST rates ahead of the festive season and also bounteous monsoon rainfall.

To be sure, not everything is cheery in the latest GDP data released by the National Statistical Office (NSO) on Friday. While growth numbers do point towards strong economic momentum, especially in the service sector of the economy, the convergence between nominal and real GDP growth rates on account of falling inflation could post some fiscal worries. Nominal GDP growth in the June quarter was just a percentage point more than the real growth of 7.8% and almost a percentage point lower than what this number was last year at 9.7%. This is perhaps a reflection of retail and wholesale inflation falling to just 2.7% and 0.3% respectively in the June quarter. GDP deflator is a weighted average of the two. Because nominal GDP is the base for revenue collection, a lower nominal GDP growth could generate headwinds for taxes over the fiscal year.

The 2025-26 Union Budget assumed a 10.1% nominal GDP growth. The revenue loss on account of effective reduction in GST rates on account of rationalization of slabs from 5%, 12%, 18% and 28% to just 5% and 18% along with a likely sin tax category of 40% – it was announced by Prime Minister Narendra Modi in his Independence Day speech – is likely to eat into the assumed tax buoyancy calculations in the budget.

“The super growth surprise of 7.8% emanates from extremely soft deflator-led technical boost, front-loaded government and front-loaded exports to the US. Some of these factors will reverse as we move ahead. However, there is likely to be a lot of noise in upcoming quarterly GDP prints,” said Madhavi Arora, chief economist at Emkay Global.

Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, said the higher-than-expected Q1 FY26 GDP growth offers some upside. However, “We remain cautious about the outlook, given the anticipated export slowdown due to higher tariffs and potential delays in production ahead of expected GST rate cuts. We expect some policy measures to be introduced to help cushion exporters from the impact of these tariffs,” Bhardwaj said.

(With inputs from Reuters)