India has grown at the fastest pace in at least a year, surprising the likes of economists and GDP pundits alike, but that growth isn’t without merit. In fact, it’s short-lived.
The super healthy GDP growth rate in the first quarter has gotten a temporary boost from front-loaded government spending—unlike last year due to 2024 Lok Sabha elections—along with front-loaded exports to the US before the 50% tariffs came in effect, Madhavi Arora, lead economist at Emkay Global said in a note.
India’s economy unexpectedly expanded 7.8% year-on-year in the April-June quarter, picking up from 7.4% in the previous three months, according to government data released on Friday. With that, India remains the fastest growing major economy, as China’s GDP growth rate came in at 5.2% and United States’ at 3.3% in the three months to 30 June.
Economists polled by Reuters had forecast India’s GDP growth rate to ease to 6.7% in Q1, and that the economy would continue to slow due to 50% US tariffs on exports. Instead, the fourth largest economy in the world has expanded to the highest since January-March 2024, when it grew 8.4% year-on-year.
Against that backdrop, here’s a look at the five key drivers behind the surge.
1. Government Capex: According to an ICRA report on 19 August, government spending is likely to have played a key role in supporting growth. In April-June, the Centre’s gross capital expenditure surged 52% year-on-year to ₹2.8 lakh crore, compared with 33.4% growth in Q4 FY25 and 35% contraction in Q1 FY24, according to data from the Controller General of Accounts.
- It’s worth mentioning here that the government stopped spending in April-June 2024 due to the model code of conduct in place for Lok Sabha elections during this time.
Similarly, new project announcements nearly doubled to ₹5.8 and project completions surged to ₹2.3 lakh crore from ₹70,000 crore in the year-ago period.
This front-loading of public investments not only boosted the headline GDP figure but also filtered into gross value added (GVA) growth. GVA, seen as a more accurate measure of underlying economic activity, grew 7.6% in Q1 FY26 versus 6.8% in Q1 FY25. It excludes indirect taxes and government subsidy payouts, which tend to be volatile.
2. Frontloading exports before US tariffs: India’s export activity received a timely boost, particularly with goods shipped in advance of the steep US tariffs that took effect on 27 August. According to Sakshi Gupta, principal economist at HDFC Bank Ltd., exports of goods and services surged by 5.9% in April due to “frontloaded demand from economies like the US”.
3. Buoyant service sector: A services sector—public administration as well as financial services—held up strongly, with services GVA projected to be among the highest in recent quarters—up to 8.3%, according to ICRA estimates.
According to data from the National Statistics Office, GVA of the financial services sector rose 9.5% in Q1 FY 26 as against 7.8% in Q4 FY25. The public administration segment grew 9.7% versus 8.7% in the previous quarter.
This surge is services helped offset the softness in industry and agriculture—while agriculture grew 3.7% in Q1 FY26 versus 5.4% in Q4 FY25, mining fell -3.1% (vs 2.5% in Q4 FY25), construction rose 7.6% (vs 10.8% in Q4 FY25), manufacturing expanded 7.7% (vs 4.8% in Q4 FY25), and electricity and public utilities increased 0.5% (vs 5.4%) in Q4 FY25.
4. Strong rural demand & monsoon: A favourable monsoon supported agriculture (3.7% in Q1 FY26 versus 5.4% in Q4 FY25), therefore rural income and consumption. Combined with rural demand, agricultute—along with construction and services—picked up meaningfully.
5. Low inflation: India’s retail inflation is at an eight-year-low. That amplifies the positive impact on real GDP growth of the country.
To be sure, these effects are, at best, transient. Many economists expect a slowdown in growth in the upcoming quarters as government spending wanes and external pressures take over. The upcoming GST reforms may cushion the blow, but only so much.
The 50% US tariffs are set to play a spoilsport in the July-September quarter, and thereafter, according to economists, with GDP growth likely to be hit by up to 1 percentage point. Urban consumption remains subdued, and private capex is showing signs of weakness despite higher public spending. A low inflation rate—though beneficial also implies modest nominal GDP growth of around 8%.
“A bigger watch factor is the sub-9% nominal GDP growth, which has a second derivative impact on tax collections and corporate profit performance,” Radhika Rao, senior economist at Singapore’s DBS Bank, told Reuters. “Markets will switch focus to the catalysts for the rest of the year, which faces an interplay of tariff-related impact, passage of front-loading of exports, boost from GST rationalisation and government spending trend with an eye on revenues.”
Moreover, the likelihood of a repo rate cut by the Reserve Bank of India are now slim, what with eight-year-low inflation print and five-quarter high GDP figures. “The sharper-than-expected GDP growth print has doused any expectations that tariff-related turmoil could prompt monetary easing in the October 2025 policy review,” ICRA’s Chief Economist Aditi Nayar said.
Others believe this is as good as it can get.
“The first-quarter numbers have surprised us all,” Sachidanand Shukla, group chief economist at Larsen & Toubro Ltd., told Reuters. “However, the biggest takeaway is that one should not be carried away by the numbers. This is the ceiling when it comes to growth numbers and it will trend down through the rest of the year.”
Earlier this month, RBI had projected India’s real GDP growth rate at 6.5% for FY26, with Q1 at 6.5%, Q2 at 6.7%, Q3 at 6.6%, and Q4 at 6.3%. These numbers are likely to hold steady.
