India's 7.8% Growth Meets Its Harshest Test

India's economy has once again confounded expectations.

- R SURYAMURTHY

NEW DELHI: In the first quarter of FY26, gross domestic product expanded by 7.8 per cent year-on-year—the fastest pace in five quarters, and well above consensus estimates of around 6.7-6.8 per cent.

Manufacturing rose 7.7 per cent, its best showing in five quarters, financial services surged 9.5 per cent, consumption climbed to 7 per cent, and agriculture managed 3.7 per cent. Exports grew 6.3 per cent while imports shot up 10.9 per cent, leaving net exports flat.

On paper, these numbers look like an economy firing on all cylinders. Scratch the surface, however, and the glow dims. Much of the growth is flattered by weak inflation, aggressive state spending, and a frontloaded investment push.

At the same time, the external backdrop has turned hostile, with punitive tariffs from the US threatening to choke India's export engine. The celebrated surge may well be a statistical high-water mark before global headwinds and domestic fatigue set in. According to Bank of America Securities (BofAS), nominal GDP slowed to 8.8 per cent from 10.8 per cent in the previous quarter, while the GDP deflator collapsed to just 0.9 per cent, the lowest in nearly six years.

The first uncomfortable truth is that part of the 7.8 per cent growth is an accounting artefact. Real GDP is inflated when nominal growth is weak but the deflator collapses, as it did this quarter. Incomes, corporate revenues, and tax collections follow nominal growth, which is running below 9 per cent—hardly the stuff of economic miracles. A supposedly roaring economy looks less formidable when one realises its headline number is built on thin price distortions.