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Analysts saw a significant macro hit if the 50% additional US tariff on Indian merchandise persists over the coming quarters. Its secondary and tertiary effects, especially in the form of job losses in export-oriented sectors, is likely to be severer, they felt. Many expressed hope that a consumption push from the proposed Goods and Services Tax (GST) rates rationalisation could serve as a buffer.
The solid growth figure for Q1FY26 was despite a 3.1% contraction in “mining and quarrying,” and a steep fall in gross value added (GVA) in the electricity sector (0.5% versus 10.1% in the year ago quarter), on account of a benign summer.
Agriculture GVA grew at a satisfactory 3.7%, compared with 1.5% in the year ago quarter and 5.4% in Q4FY25.
The secondary sector that comprises manufacturing (7.7%) and construction (7.6%) held steady, but on a cumulative basis, still grew at a lower rate of 7%, compared with 8.6% in the year-ago quarter.
It was the bulky tertiary sector that boosted the GDP, with all categories of services, including those driven by public administration (government spending) growing much faster both sequentially and on an annual basis.
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The GDP had grown at 6.5% in Q1FY25, and 7.4% in Q4FY25; a sequential slowdown was widely expected. While both GDP and GVA grew at the same rate in Q1FY24, Q1 of the current fiscal saw GVA growth to lag at 7.6%, showing robust indirect tax receipts and a relative control on subsidy spending.
Of the expenditure components of the GDP, private final consumption expenditure grew at 7% in April-June of the current fiscal, on a strong base (8.3%), indicating the liberal income tax relief announced in Budget FY26 has had a rather quick impact.
Challenges and buffers for India’s economy
Gross fixed capital formation, proxy of investment demand, grew at 7.8% compared with a year-ago rate of 6.7%. This was, however, largely due to a jump in the government’s capital expenditure, rather than acceleration in private-sector capex. The Centre’s budgetary capex grew 52% in April-June; similarly, investments by state governments, as indicated by an FE study of the finances of 16 major states, likely rose by 30% year-on-year in the period.
Many economists have highlighted that yardsticks such as the ratio between capital expenditure to net operating margin of firms and bank credit to industry aren’t strong enough to produce a growth rate above 7%.
In a recent note, Crisil said that as in the past five financial years, the government seems to drive investments so far in the current fiscal too, as private corporate capex remained muted. The agency warned that as the government eventually tones down its capex over the medium term with fiscal consolidation, it should focus on reducing regulatory bottlenecks for businesses.
While the growth is expected to be sequentially lower in the current quarter despite a favourable base (5.6%) and the next, there are some positive factors too. “On the face of it, a softer deflator effect and some consumption buffer from GST cuts could offset the hit in real GDP growth as we move to calendar year 2026,” says Madhavi Arora, lead economist at Emkay Global.
Nominal GDP in Q1FY26 grew at 8.8%, reflecting one of the narrowest gaps with real GDP expansion in several quarters.
According to Sujan Hajra, chief economist & executive director at Anand Rathi Wealth, while risks remain, most notably the recent 50% US tariff on Indian exports, with reforms gaining traction and inflation staying modest, things could look brighter. “Growth for the full year is still likely to average around 6.5%, even after factoring in tariff headwinds, while nominal GDP growth in the high single digits supports corporate earnings expansion of 11–13%. India’s macro strength provides a robust foundation for the equity market outlook,” Hajra added.
Aditi Nayar, chief economist at Icra, wrote: “The sharper than expected GDP growth print, which represents an acceleration over the previous quarter, has doused any expectations that the tariff related turmoil could prompt monetary easing in the October 2025 policy review.”
According to Paras Jasrai, associate director at India Ratings, while the latest growth numbers were higher than expectations, ““a worrying factor was the sliding nominal GDP growth due to benign inflationary trends.” The GDP deflator, a proxy for capturing inflation at the economy level, stood at a 23-quarter low of 0.9% year-on-year in Q1FY26,” Jasrai noted. He, however, took heart from “the signs of a broad-basing of consumption demand.”