Q1FY26 GDP growth: Five quarter growth gives hope for continued momentum

The Indian economy grew at a higher-than-anticipated rate of 7.8% in the first quarter of financial year 2025-26, giving some hope that growth could continue on the expected trajectory. However, concerns remain over the impact of the 50% tariffs imposed by the US.
 
As per official estimates released on Friday, India’s GDP grew at a five-quarter high of 7.8% in the April to June 2025 quarter as against 6.5% in the first quarter of last fiscal and 7.4% in the fourth quarter of last fiscal. Gross value added at basic prices also expanded by 7.6% in the first quarter of the fiscal as against 6.5% a year ago.

“Real GDP grew by 7.8% in Q1 FY26, reflecting strengthening momentum in the economy, anchored by strong macroeconomic fundamentals. The High Frequency Indicators had been green-signalling the potentially higher numbers. As you can see, supply-side growth was driven by manufacturing, construction, and services, reflecting an all-round growth. On the demand side, robust expansion in PFCE (7.0%) and GFCF (7.8%) underpinned performance. The PFCE’s share in GDP rose to 60.3%, the highest first-quarter level in 15 years. The Government’s capital expenditure also sustained the momentum in GFCF’s growth,” sources in the Finance Ministry told Business Today.
 
The Reserve Bank of India has pegged GDP growth at 6.5% this fiscal while the Economic Survey 2024-25 projected that the economy would grow at about 6.3% -6.8% in the current financial year.

Chief Economic Advisor V Anantha Nageswaran pointed out that high frequency indicators for July 2025 indicate a carry forward of the first quarter economic momentum and domestic demand is expected to strengthen in the upcoming quarters with the onset of the festive period and forthcoming GST changes along with an above normal monsoon.
 
The penal tariffs from the US are seen to be short lived, he said, adding that industry is also looking to diversify into other markets. “While there is some uncertainty due to tariff related concerns…. but in general conversations are going on and we see some kind of a resolution in the not so different future. We do believe that growth target in the current fiscal year especially in the strong showing of the first quarter of FY26, we still retain the 6.3% -6.8%,” he told reporters after the GDP data was released.
 
He further said it is difficult to give a precise impact of the US tariff on growth at this point due to secondary impact and implications.
 
Noting that the Prime Minister has also called for using this situation as an opportunity to look at domestic reforms, deregulation, rationalisation of rates and procedures in GST and boost competitiveness of their products, he underlined that collectively, between the public and private sector initiatives, we can turn the situation to long term opportunity.
 
Growth was broad based with the manufacturing sector clocking a growth of 7.7% and construction expanding by 7.6%. Services also grew at a robust pace of 9.3% with all three sectors of trade, finance and public administration registering high growth. While trade, hotels, transport and communication expanded by 8.6%, banking and finance, real estate grew by 9.5% and government spending at 9.8%.
 
Both consumption and investments grew at a strong pace although private final consumption expenditure grew at a slower 7% in the first quarter of the fiscal as against 8.3% a year ago. Government final consumption expenditure, which had contracted by 0.3% in the first quarter of the last fiscal, expanded by 7.4% in the June 30 quarter this fiscal. Gross fixed capital formation, which is a bellwether for investments, grew by a faster 7.8% in the first quarter of the fiscal as against 6.7% a year ago.
 
But there is expectation of stronger domestic demand going forward as the income tax cuts, 100 basis repo rate cut and the proposed reduction in goods and services tax come into effect.
 
DK Srivastava, Chief Policy Advisor, EY India noted that the only vulnerable segment of demand comprises exports which grew at 6.3%, lower than the growth of imports at 10.9% in the first quarter of FY26. “As a result, the contribution of net exports to real GDP growth has turned negative at (-) 1.4% points after showing positive contribution averaging 2.2% points in the last four quarters,” he pointed out.
 
Going forward, he said the situation regarding net exports is likely to continue to face challenges and underlined that the Centre has to continue to provide fiscal support to overall growth through an emphasis on government capital expenditures and activate efforts for improving government’s tax revenue performance.
 
Madan Sabnavis, Chief Economist, Bank of Baroda however, pointed out that the share of exports in GDP has remained unchanged at 20.9% which hence does not indicate any frontloading of exports to USA in this period. “The economy hence does look poised to clock the growth rate of 6.5% for the year notwithstanding the tariff effects which could affect growth by 0.2-0.4%,” he said.
 
Paras Jasrai, Associate Director, India Ratings and Research said it is vital that the Centre maintains the capex momentum and frontloads their capex plans (like in FY24) in view of the unprecedented volatility and uncertainty in the global economic environment. “This will provide the much-needed support to the weak investment profile,” he said, adding that going forward, declining retail inflation, monetary easing and rationalisation of GST rates bodes well for consumption demand.
 
“The gradual impact of declining inflation is already getting reflected. Higher tariff could cast a shadow over economic recovery and will have an impact on FY26 growth as well,” he further said, adding that India would remain a key growth engine and help the world navigate in the current treacherous waters. 
 
Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank also expressed caution on the way ahead amid expected slowdown in exports from higher tariffs along with deferring in production ahead of GST rate cuts.