Why in the News?

• India’s GDP grew 7.8% in Q1 FY26, the fastest in five quarters, driven by strong manufacturing, services, and construction despite US tariff headwinds.

What’s in Today’s Article?

• GDP Growth (Introduction, GDP Growth, Sectoral Growth, Global & Domestic Headwinds, Consumption & Investment Trends, Outlook, etc.)

Introduction

• India’s economy registered an impressive 7.8% GDP growth in the first quarter of FY26 (April-June 2025), its fastest pace in five quarters.
• This surge was fuelled by strong performances in manufacturing, services, and construction sectors, consolidating India’s position as the world’s fastest-growing large economy.
• The growth comes at a critical juncture when global trade is under pressure due to the US imposing steep tariffs on Indian goods, testing the resilience of the Indian economy.

Sectoral Performance Driving Growth

• Manufacturing Momentum
  • The manufacturing sector expanded 7.7%, a significant improvement over the 4.8% recorded in January-March 2025 and slightly above the 7.6% in the same quarter last year.
  • This indicates robust industrial demand despite external trade uncertainties.
• Construction and Infrastructure
  • Construction activity maintained a 7.6% growth rate, though slower than the 10.1% posted in Q1 FY25.
  • Despite moderation, the sector’s resilience reflects steady infrastructure investments and housing demand.
• Services Sector as the Growth Engine
  • The services sector grew 9.3%, its highest in two years. Within this:
    • Public Administration, Defence & Other Services surged 9.8%, indicating higher government expenditure.
    • Financial, Real Estate & Professional Services grew 9.5%, aided by financial sector expansion.
    • Trade, Hotels, Transport, and Communication posted 8.6% growth, reflecting recovery in travel and consumer demand.

• Agriculture and Utilities
  • Agriculture grew by 3.7%, more than double last year’s growth of 1.5%, highlighting rural sector strength.
  • However, the electricity, gas, water supply, and utilities sector slowed sharply to just 0.5%, partly due to heavy rains reducing power demand.

Global and Domestic Headwinds

• US Tariff Impact
  • On August 27, 2025, the US imposed a 50% tariff on Indian exports, including textiles, gems, and engineering goods.
  • While the move raised concerns about export-linked jobs and consumption, India’s Chief Economic Advisor emphasised that the impact would be “modest” and demand growth would hold up.
• GST and Tax Reforms
  • The government has sought to bolster demand by lowering indirect tax rates and pushing for GST rationalisation, expected to further stimulate consumption in the festival season.
  • Additionally, direct tax cuts announced in the Union Budget 2025-26 continue to support disposable incomes.

Consumption and Investment Trends

• Private consumption expenditure grew 7%, slower than the 8.3% in the previous year but an improvement over the previous quarter’s 6%.
• Investment demand, measured through Gross Fixed Capital Formation, expanded 7.8%, showing continued corporate and infrastructure investments.
• Government expenditure also rebounded strongly, rising 7.4%, after contracting in the prior quarter.

Outlook for FY26

• Despite tariff headwinds, policymakers and economists remain confident of India maintaining its growth trajectory:
  • The government expects FY26 GDP growth in the 6.3-6.8% range, retaining India’s global growth leadership.
  • Nominal GDP growth stood at 8.8%, the lowest in three quarters, but still supportive of corporate earnings growth.
  • Economists caution that low inflation boosted real GDP growth figures; sustained reforms and export diversification will be critical.