India’s economy grows 7.8% in Q1, defying global headwinds

By: Shantanu Bhattacharji

The economy is expected to grow around 6.5% this year. Higher Trump tariffs may slow it down a little, but lower prices should help keep growth steady.

The economy has begun the new financial year on a strong note, expanding 7.8 per cent in the first quarter (Q1) of 2025-26. The numbers reflect more than just statistical good luck. Strong consumer demand at home, increased government spending on infrastructure, and the ever-reliable services sector have powered growth. A favourable base has certainly made the numbers look better, but the momentum is genuine.

The encouraging part is that growth has been broad-based. Manufacturing and construction—two areas that often signal the health of the economy—showed robust activity alongside services, suggesting that recovery is not confined to one sector alone.

Yet, the picture is not without shadows. Mining and electricity have lagged, showing that parts of the supply side remain weak. More importantly, global conditions are far from ideal. Sluggish demand in advanced economies, trade disputes, and unpredictable energy prices could weigh on exports and supply chains in the coming months.

For the finance ministry, the immediate challenge is to keep the investment cycle running without stretching finances too far. Public capital spending has been a key driver, but the private sector will need to step up if momentum is to be sustained.

Looking ahead, much will depend on two factors: steady domestic consumption and resilience in exports despite global headwinds. If both hold, India could still end the year as one of the fastest-growing major economies in the world.

Agriculture and allied activities grew 3.7 per cent in the first quarter, more than double last year’s pace. The turnaround came largely on the back of a good monsoon and wider use of technology in farming. If the rains stay reliable, growth of 4.5–5 per cent could soon become a regular feature in the farm economy, providing a steadier base for rural incomes.

Industry, however, showed only modest progress. Corporate earnings and factory output data had already hinted at slower activity, and the numbers confirmed it. Weak industrial growth has also meant that private investment remains cautious. Still, there were some positives: manufacturing expanded by a healthy 7.7 per cent, showing clear improvement from the previous quarter. Mining and electricity, by contrast, contracted—the latter dragged down by abundant rains that reduced demand for power.

The real driver of growth was the services sector, which makes up more than half of the economy. It grew a robust 9.3 per cent, strengthening both year-on-year and compared with the previous quarter. Services continue to power ahead despite global trade frictions, underlining their central role in economic momentum.

The message from these trends is clear. Services remain the growth engine, agriculture is showing signs of resilience, and manufacturing has begun to regain strength. But the weakness in broader industry and the hesitancy in private investment highlight the need for policy focus on sustaining demand, boosting jobs, and ensuring rural stability. How well India balances these pieces will shape whether today’s momentum can turn into lasting growth.

On the expenditure side, household spending continues to dominate, making up more than 60 per cent of the GDP. Encouragingly, rural demand—weak for several years—is beginning to show signs of life. A rise in FMCG sales volumes points to better consumption in villages and smaller towns, a shift that could support steadier overall growth.

Urban demand, however, has been slower to pick up. Stagnant wages and higher household debt have kept city consumers cautious, delaying a full recovery in big-ticket purchases. The government’s plan to rationalise GST rates may help by making consumer durables and household appliances more affordable.

Meanwhile, public capital spending remains the main engine pushing the economy forward. The government’s heavy investment in infrastructure continues to create jobs and stimulate demand across industries. Adding to this momentum, exports grew 21 per cent in value terms, helped by frontloaded shipments before global uncertainties could weigh on trade flows.

Taken together, the numbers suggest India’s economy is being powered by a mix of household consumption, public spending, and exports. But sustaining this momentum will require more than government-led investment. The private sector needs to step up with fresh capital spending, while policymakers must ensure that rural revival stays on track and urban consumption regains steam.

If these pieces fall into place, India could not only remain one of the fastest-growing major economies this year but also turn today’s bright start into a durable upswing. If not, this strong quarter may end up as just a flash of brilliance in uncertain times.