Pleasant GDP surprise: Now for the tough part

Growth accelerated in the first quarter of 2025-26 but India's economy stares at a slowdown now as US tariffs begin to hurt. Our reforms must aim for a competitive edge, not just a buffer.

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India's initial estimate of gross domestic product (GDP) in the first quarter of 2025-26 sprang an upside surprise. The Indian economy recorded real expansion of 7.8%-its best pace in five quarters, a pick-up from the previous quarter's 7.4% and notable for its broad sweep of sectors from farms and factories to services. This suggests a stronger growth impulse than forecasters may have pencilled in. It also ups confidence in the economy's resilience. Although we face trade headwinds from here on, real GDP growth of about 6.5% this fiscal year might still be on the cards. A key role was played by a surge in spending by the government, as visible in an enlarged budget gap and in sharp contrast with last year's election-strapped first quarter.

April to June 2025 also stood out for its nominal growth-in current rather than constant 2011-12 prices-estimate of 8.8%. Real growth only a percentage point shy of nominal implies a low 'GDP deflator' and reflects benign inflation at both the wholesale and retail levels.