The Indian economy has grown by 7.8 per cent in the April-June quarter of 2025-26 (Q1FY26), the fastest in the past five quarters, surpassing analyst estimates of 6.8-7 per cent for the quarter. But there is a caveat — an additional 25 per cent tariff imposed on India by the US through an executive order (July 31, 2025) for importing Russian oil did not have a bearing on the growth print for the quarter.

The growth numbers for Q1FY26 saw both sequential (7.4 per cent in Q4FY25) and year-on-year improvement (6.5 per cent in Q1FY26) (see chart).

The previous highest pace of growth in the country’s GDP was recorded at 8.4 per cent during Q4FY24. India remains the fastest-growing economy, surpassing China’s April-June quarter GDP growth of 5.2 per cent.

While the Q1FY26 numbers were also ahead of the RBI’s estimate of 6.5 per cent, analysts remain cautious on the growth from the second quarter (Q2) onwards on account of the US tariffs.

Nominal GDP has witnessed a growth rate of 8.8 per cent in Q1FY26, which was also higher than analyst estimates of 8 per cent for the quarter. The gap between nominal and real GDP has come down on account of low inflation.

Growth drivers

A combination of an improvement in the manufacturing growth, a strong show in the services sector and government spending has contributed to the growth.

The manufacturing sector saw a growth of 7.7 per cent during Q1FY26 compared with 7.6 per cent in Q1FY25 and 4.8 per cent in Q4FY25.

The tertiary sector, comprising services such as trade, hotels, transport, communication, financial, real estate professional services, government administration, among others, grew 9.3 per cent during Q1FY26 compared with 6.8 per cent in Q1FY25 and 7.3 per cent in Q4FY25.

The government’s final consumption expenditure, which includes its spending on goods and services, saw a strong growth of 7.4 per cent against -0.3 per cent in Q1FY25, primarily on account of a lower spend during the election period in the previous year.

Private final consumption expenditure growth was at 7 per cent in Q1FY26 compared with 8.3 per cent in Q1FY25 but higher than 6 per cent in Q4FY24, representing a bounce-back in consumer spend during the quarter.

“Evidently, the income tax exemptions that came into effect starting this fiscal year have started showing their impact on households’ disposable incomes and discretionary spending.

“We expected consumption to be stronger as higher frequency data on retail sales growth averaged 6.8 per cent in FY26 till July (up from 3.5 per cent in FY25), while the FMCG sector expanded by 13.9 per cent in Q2 2025.

“Both the data points to a broad-based consumption spending backed by rural demand resilience and urban demand recovery,” said Rumki Majumdar, economist, Deloitte India.

Above normal monsoon and early rains have resulted in agriculture growing by 3.7 per cent during Q1FY26 compared with 1.5 per cent in Q1FY25.

“Strong farm income also explains the sustained rural spending (as seen in FMCG growth) and lower consumer inflation, which touched 1.55 per cent in July,” said Majumder.

Cautious outlook

A higher-than-anticipated Q1 GDP growth print, however, is not leading to economists immediately revising their growth outlook.

“After the unexpectedly strong Q1FY26, a lower year-on-year momentum of government capex and the looming hit to exports from the US tariff and penalties would dampen growth prints in the coming quarters, notwithstanding the balm offered by GST rationalisation.

“Amidst continuing uncertainty, we maintain our
baseline GDP growth forecast at 6.0 per cent for FY26,” said Aditi Nayar, chief economist, Icra.

The Q1FY26 growth numbers have also “doused any expectations” of a monetary easing by the RBI in the October 2025 policy review, Nayar said.

“We remain fairly cautious on the way ahead amid an expected slowdown in exports from higher tariffs, along with deferring production ahead of GST rate cuts. We expect some policy interventions to help offset the adverse impact of the tariff impact on exporters,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

“India’s export advantage would fade in the coming quarters because of the 50 per cent tariff hikes imposed
by the US. Alongside, a broader global slowdown triggered by the tariff actions could further dampen external demand.

“Additionally, higher US tariffs and elevated uncertainty could impact domestic private investments this fiscal. We expect India’s GDP to grow 6.5 per cent this fiscal with downside risks from the US tariff hikes,” said Dipti Deshpande, principal economist, Crisil.