The finance ministry said in its latest monthly economic review that “overall, the first quarter of FY26 presents a picture of resilient domestic supply and demand”, and that the economy “sustained its growth momentum” in the period. The previous quarter had seen gross domestic product (GDP) expansion of an inspiring (and surprising) 7.4%, upon a strong base (8.4%), though the gross value added (GVA) grew at a relatively lower rate of 6.8%. However, Q4FY25 also saw a fall in the share of private consumption in GDP to just 53% from 60% in the previous quarter. The GDP growth fell sharply to 6.5% in FY25 from 9.2% in the previous year. Most analysts, including rating agencies and brokerages, predicted a further loss in India’s growth momentum. This was implicitly endorsed by the government, with a broad-range (6.3%-6.8%) estimate in the Economic Survey. Against this background, and in the milieu of the global tariff war, the finance ministry’s latest assessment suggested a relative steadiness in the country’s economic performance, or at least that the growth loss would not be steep. Not to forget that economists in the government have been candid enough to state that “slow credit growth and weak private investment” might restrict acceleration in economic momentum.
Tariff tremors and trade risks
Just a couple of days before the US shocked India with a 25% tariff and a punitive levy for purchasing oil from Russia, the ministry had warned that continued uncertainty on the US tariff front might weigh on the country’s trade performance in the coming quarters. That looks more real now, with the perceived threat of 20-40-basis point hit to the current year’s growth from Trump’s tariffs. It is estimated that even as the year is a third through, and despite a 21% growth in merchandise exports to the US in April-June, if the extra tariffs remain at the current level, shipments to the country’s largest export destination might shrink 30% on year in FY26.
Of course, the US tariff is likely to be reduced as a result of the ongoing bilateral talks, and a fair bit of accommodation of Washington’s interests by India, but for the time being, the country is put at a relative disadvantage vis-à-vis almost all major competitors. The best-case outcome could be a tariff around 20%, which could still have significant adverse implications for the country, and cause considerable job losses. Any cessation of oil imports from Russia could potentially jack up the annual import bill by $10 billion or thereabouts, even with deft diversification plans in respect of sourcing of crude.
Domestic indicators signal slowdown
Before the Trump salvo, the finance ministry had spoken of high-frequency indicators which “reflected broad-based strength”. But there are enough reasons to believe that this might turn out to be an over-optimistic assumption. Net goods and services tax receipts grew just 1.7% in July and retail auto sales dropped 4.5% on year, with passenger vehicles sales falling 1.4%. At Rs 4.1 lakh crore, the value of new project announcements in the April-June period was the lowest in four quarters. At just 2%, the growth in the index of industrial production in Q1FY26 was the lowest in 10 quarters. Corporate earnings data for Q1FY26 show stress across sectors, and expose the limits of a strategy that unduly relies on cost optimisation amid long-stagnant revenue growth. Proactive policies are urgently needed to energise and boost the confidence of all economic actors. In their absence, external shocks could further hit the growth impulses.