With a stellar 7.8% year-on-year expansion in the June quarter, the Indian economy has demonstrated a degree of resilience that few expected amid the disruptions caused by the war in West Asia. Growth has moderated from the 8.6% recorded in the March quarter, but the latest print is nonetheless impressive.
More encouragingly, the strength is fairly broad-based. Gross value added grew an even stronger 8.2%, supported by both manufacturing and services. Manufacturing in particular has posted a good 9.2% increase during the quarter; corporate results suggest the output from segments such as capital and engineering goods as also automobiles and other durables has been strong.
Despite tariff troubles in the US market and the hostilities in West Asia, exports grew at 12% during the quarter. Services, which generate a large number of jobs, have also held up well. Financial services benefitted from robust credit growth, while the employment-intensive trade and transport segment managed to overcome both war-related disruptions and an unfavourable base.
Public administration grew 7.5%, suggesting that spending by the Centre and states continued to support economic activity. The more important takeaway, however, is on the demand side: both consumption and investment pulled their weight.
Gross fixed capital formation surged nearly 12%, its strongest showing in the new gross domestic product (GDP) series. Government capex has undoubtedly contributed, but the number is encouraging at a time when a broad-based revival in private-sector investment is still awaited.
Consumption, too, proved more resilient than anticipated. Higher oil prices and concerns over employment might have been expected to constrain household spending, yet private final consumption expenditure grew a healthy 7.1%. Income-tax relief and goods and services tax rate cuts appear to have provided support, something also reflected in high-frequency indicators such as automobile sales and property purchases.
There is, however, reason for some caution. Nominal GDP grew just 10.3%, well below expectations of 12.5-13%. The relatively narrow gap between nominal and real growth suggests moderate aggregate price pressures, but inflation in specific categories can still erode household purchasing power.
Moreover, the consumption boost from tax cuts will eventually fade. The pace of expansion could therefore moderate in the coming quarters. El Niño conditions pose a risk to farm output, while a prolonged period of elevated oil prices would squeeze both household budgets and corporate margins.
Global conditions are another source of uncertainty, particularly if higher US interest rates weigh on growth and capital flows. Even so, the strength of the first-quarter numbers suggests that growth of 7% or more for FY27 is increasingly achievable, barring a fresh external shock.
The composition of Q1 growth — investment, consumption, and exports all contributing meaningfully — is arguably as reassuring as the headline number itself. There is also an important implication for monetary policy. The strong growth performance gives the Reserve Bank of India greater room to raise rates if inflation becomes more generalised and begins to overshoot its projections.
The central bank expects headline retail inflation to remain above 5% from September through June 2027, but has so far refrained from tightening because price pressures have not become broad-based. There is no reason to pre-empt that judgement. But with growth displaying considerable resilience, the trade-off facing the Monetary Policy Committee has become easier: should inflation broaden, it can act without having to worry unduly about jeopardising the recovery.