India’s real GDP grew 7.8 percent in Q1 of 2025-26, hitting a five-quarter high. The latest print beat the RBI’s projection of 6.5 percent by 130 basis points and tossed aside market consensus, which assumed growth to have slowed in Q1. The higher-than-expected GDP number comes just when India is engaged in an intense tariff tussle with the US and amid Donald Trump’s intemperate remark that India’s economy was ‘dead’. In this backdrop, the robust Q1 data confirms that our macroeconomic fundamentals are indeed strong. That said, we may have to hold the jubilation as analysts reason that the economic vigour is not entirely due to higher national output. For one, it comes against a low base last year and because lower subsidy payments pushed up the headline GDP number. Moreover, the economy was resilient in Q1, when the going was good for the proposed India-US trade deal. But as soon as Q2 began, the trickle of bad news on the tariff front started.
It means the impact of tariffs may show up in Q2 and could be pronounced from Q3 onwards in case India fails to strike a deal. The thirds quarter could even end with a whimper, as sectors like auto are raising concerns about delayed festive sales with customers waiting for lower GST rates to kick in before Diwali. Meanwhile, Q1’s better-than-expected performance will likely bump up the full-year GDP forecast unless the US trade tariffs deliver more nasty surprises. For now, it’s estimated that tariffs will likely drag India’s growth potential by 30-40 bps, though analysts fear the final dent in national output could be much higher. Moreover, Q1’s rebound in economic activity was driven by easing food and energy prices, lower interest rates, rising investments, and higher net tax collections—and not all of them are assured to hold in Q2 and thereafter.
As for sectoral performance, while services have finally come around, it is unclear whether it can sustain the momentum. The same holds true for the manufacturing and construction sectors, which too saw handsome growth in Q1, followed by agriculture, which turned in a decent performance. Lastly, government expenditure continues to drive growth, as private consumption and investments are still punching below their potential, and needs to move other muscles to achieve broad-based growth.