India shocks markets with 7.8% GDP growth in Q1 despite tariff headwinds

New Delhi: India’s economy grew far faster than expected in the April–June quarter, expanding 7.8% year-on-year, government data showed on Friday. The pace picked up from 7.4% in the previous quarter, cementing India’s position as the world’s fastest-growing major economy. By comparison, China’s GDP rose 5.2% and the US economy grew 3.3% during the same period.

The outcome surprised economists, who had forecast growth to slow to 6.7%, weighed down by the impact of steep 50% US tariffs on Indian exports. Instead, growth climbed to its highest since the March 2024 quarter, when GDP surged 8.4%.

Gross Value Added (GVA), which excludes taxes and subsidies, also rose sharply to 7.6% in Q1 FY26, compared with 6.8% in Q4 FY25 and 6.5% a year earlier.

Sectoral performance

• Agriculture expanded 3.7% in Q1, versus 1.5% last year.
• Manufacturing grew 7.7%, nearly unchanged from 7.6% a year ago.

Earlier this month, the Reserve Bank of India (RBI) had projected growth at 6.5% for Q1 FY26, with full-year growth pegged at 6.5%.

Madhavi Arora, lead economist at Emkay Global, said the stronger-than-expected data was aided by “a temporary boost from an extremely soft deflator, front-loaded government spending, and exports to the US.” She cautioned that some of these factors may reverse, especially as the tariff impact begins to weigh on exports, jobs, wages, and consumption.

Still, Arora noted that GST cuts and softer deflator effects could cushion real GDP growth in 2026.

Fiscal deficit widens

Meanwhile, India’s fiscal deficit rose to 29.9% of the full-year target at the end of July, up from 17.9% at the end of Q1. In absolute terms, the gap between expenditure and revenue stood at ₹4.68 lakh crore during April–July of FY26. The government has budgeted the fiscal deficit at 4.4% of GDP (₹15.69 lakh crore) for the current year.