India’s GDP grows at fastest pace in five quarters to 7.8%

India’s economy grew at its fastest pace in five quarters in the three months through June, lifted by a burst of front-loaded exports and a favorable monsoon, though economists warn that momentum may falter as fresh US tariffs begin to bite.

Gross domestic product (GDP) expanded 7.8% year-on-year in the April–June quarter of fiscal 2026, up from 6.5% a year ago and 7.4% in the previous quarter, data released on Friday by the National Statistics Office showed.

Nominal GDP rose 8.8% to ₹86.05 trillion ($1.03 trillion) from ₹79.08 trillion a year ago, while real GDP at constant 2011-12 prices reached ₹47.89 trillion. Real gross value added grew 7.6% to ₹44.64 trillion.

The official figures outstripped the 6.7% consensus in a Bloomberg survey of 37 economists, underscoring resilience in Asia’s third-largest economy even as global trade headwinds mount.

Exporters had rushed shipments to the US in the quarter after US President Donald Trump temporarily paused reciprocal tariffs earlier in the year, helping prop up trade numbers.

The early onset of monsoon rains spurred sowing, boosting rural consumption and lifting agricultural growth to 3.7% from 1.5% a year earlier.

Construction and manufacturing both grew above 7.5%, while services surged 9.3%, driven by trade, hotels, transport, financial services, and public administration.

Government consumption rebounded with a 9.7% gain in nominal terms, and private final consumption expenditure increased 7%, showing that household demand remained solid though below last year’s 8.3% pace.

Gross fixed capital formation rose 7.8%, pointing to stable investment activity.

Even so, economists cautioned that much of the strength was transitory.

“We’ve seen significant front-loading on the export side,” Sonal Varma, chief economist for India and Asia ex-Japan at Nomura Holdings, told Bloomberg Television. “Urban consumption and private capex are still weak.”

Varma estimates GDP growth at 6.9% for the June quarter but sees it slowing sharply to below 6% in the second half of the fiscal year.

Bank of America economists Rahul Bajoria and Smriti Mehra also flagged weak mining, softer power demand, and a slump in auto sales as downside pressures, noting a likely gap between GDP and gross value added due to lower subsidies and higher taxes.

The government’s data showed mining and quarrying output contracted 3.1%, while electricity, gas, and water supply rose just 0.5%. Vehicle sales declined during the quarter, reflected in private auto registrations that fell more than 5% year-on-year.

Cement output grew 8% and steel consumption rose nearly 8%, supporting construction growth. Trade and transport activity at ports and airports was positive, but railway freight slowed to just 0.7% growth.

Trouble ahead

The second quarter may prove more difficult. This week, on Wednesday, 27 August, Washington reinstated and expanded tariffs of up to 50% on Indian exports, the steepest such levy imposed on any Asian economy.

The duties target labor-intensive sectors such as textiles, footwear, jewelry, and leather goods, threatening jobs in industries that employ millions.

Citigroup estimates the tariffs could shave 0.6 to 0.8 percentage points off India’s annual growth.

“Growth faces headwinds from US tariffs and weaker global demand, which will pressure India’s export and labor-intensive sectors,” said Indranil Pan, chief economist at Yes Bank.

India’s export exposure to the US is significant in value terms as shipments totaled $87.4 billion in 2024 but still modest relative to the $3.5 trillion economy, accounting for about 2% of GDP.

With private consumption making up roughly 60% of output, India remains largely domestically driven, cushioning some of the blow from global shocks.

Still, the concentration of tariffs on labor-heavy industries could strain employment and rural incomes.

Prime Minister Narendra Modi’s government has moved to cushion the impact.

Finance ministry officials have proposed streamlining the Goods and Services Tax to simplify compliance and reduce costs for small firms.

Analysts at IDFC First Bank estimate the GST changes could lift nominal GDP growth by 0.6 percentage point over 12 months.

The Reserve Bank of India has also delivered 100 basis points of rate cuts since February, bringing the repo rate down to 5.5% and easing liquidity constraints.

“Outside monetary support, the need of the hour is more targeted export support,” Varma said, noting that the full impact of tariffs would likely show after September.

India also continues to draw strength from services, which account for over half of GDP. Financial, real estate, and professional services grew 9.5% in real terms, while public administration and defense rose nearly 10%.

Trade, hotels, transport, and communications expanded 8.6%. These gains offset the drag from mining and energy. The government noted that higher bank credit, buoyant insurance premiums, and improved GST collections contributed to services growth.

Fiscal spending also supported the quarter. Government consumption reversed a contraction last year, climbing 7.4% in real terms.

Revenue expenditure excluding interest and subsidies rose nearly 10%. With food prices stable and consumer inflation averaging 2.7% in the quarter, households benefited from better purchasing power, though rural wage growth has lagged.

Looking ahead, economists expect moderation. S&P Global Ratings projects India to grow 6.8% over the next three years, while the RBI maintains its 6.5% forecast for FY26.

The International Monetary Fund has warned that persistent global trade tensions and capital flow volatility could weigh on India’s external balance, even if domestic demand remains robust.

The broader backdrop is a world economy still struggling with trade fragmentation. Trump’s tariff campaign has hit allies and rivals alike, with India facing the sharpest hikes in Asia.

China and Vietnam also contend with secondary duties, but India’s labor-intensive sectors make it especially vulnerable.

The tariffs come just as New Delhi was negotiating a trade package with Washington that officials hoped would stabilize ties after years of friction.

Despite the risks, policymakers argue India’s fundamentals remain sound. The government’s release emphasized the breadth of growth across agriculture, manufacturing, and services.

It also highlighted a recovery in investment, with gross fixed capital formation accounting for 30.4% of GDP. Officials underscored that improvements in GST administration, infrastructure push, and policy reforms would help sustain growth even amid external shocks.

Private economists are less sanguine. Many expect growth to slide below 6% in the second half as export orders slow, inventories normalize, and the tariff impact filters through.

With auto sales weak and urban employment under pressure, consumption may cool. Investment intentions remain patchy, with private sector capex hesitant despite government incentives.

At 7.8%, India remains the fastest among major economies, outpacing China, which grew 4.9% in the same quarter.