India’s Q1 GDP Data: What Led to a 5-quarter Growth?

India shines brighter against all odds. It may not be a proverb, but the country’s growth trajectory certainly makes a case for it.

India’s Gross Domestic Product (GDP) growth in Q1 FY2025-26 (April–June 2025) surged to 7.8%, marking a five-quarter high and beating all forecasts. In actual numbers, the National Statistics Office (NSO) estimated real GDP at ₹47.89 lakh crore in Q1 FY26, up from ₹44.42 lakh crore a year earlier. Nominal GDP rose 8.8% to ₹86.05 lakh crore.

This figure has surprised economists, who had expected around 6.5–6.7% growth, and has also exceeded the Reserve Bank of India’s (RBI) own projection of 6.5% for the quarter.

It makes India the fastest-growing major economy, outpacing China’s 5.2% expansion in the same quarter.

But a pertinent question needs to be addressed: What fuelled such good but unexpected momentum, and is it really an economic surge?

Let’s decode.

Real vs Nominal GDP: The Deflator Effect

The Good Factor

In this year’s Q1, real GDP growth shot up to 7.8% YoY, while nominal GDP (including inflation) grew 8.8%. Last year’s Q1 saw a higher inflation environment, with nominal growth at 10.8% compared to 6.5% real growth, indicating a larger gap.

Now, as seen, the key feature of this GDP report is the unusually small gap between real and nominal growth. (7.8% and 8.8%). In other words, the GDP deflator (broad inflation measure) was barely ~1%, much lower than a year ago when high inflation made nominal growth 10.8% vs 6.5% real (about 4% difference). This is called the “Deflator Effect.”

“Deflator Effect” means that low inflation actually boosted real growth on paper. Easing price pressures, where CPI inflation cooled to ~2–3% by mid-2025, with food prices even in deflation, have increased consumers’ purchasing power and reduced input costs.

Thus, low inflation allowed the economy to record strong real gains without a corresponding increase in nominal spending. In short, softer prices amplified real GDP growth.

The Not-so-good Factor

The growth figure has sparked a mixed response from analysts, with many expressing cautious optimism while raising concerns about the statistical methodology behind the impressive headline number.

The Deflator Effect worked through several mechanisms:

Wholesale Price Index (WPI) deflation: Near-zero WPI inflation during the quarter
Moderate Consumer Price Index (CPI): CPI remained below 3%
Statistical amplification: The low deflator artificially boosted real GDP calculations

Economists estimate that the Deflator Effect may have overstated real GDP growth by at least 100 basis points (1 percentage point). This means the underlying economic growth was likely closer to 6.8% rather than the reported 7.8%, according to news reports.

It’s a bit of a statistical quirk (as nominal GDP growth was modest), but undeniably soft inflation provided a “free lift” to real GDP. It’s often seen as a rare combination that may not persist as conditions normalise.

However, despite the technical complexities around the Deflator Effect, India’s Q1 performance reveals several genuinely positive underlying trends that analysts acknowledge and celebrate.

Q1 GDP: Sectoral Performance

Any guesses for the largest contributor to overall GDP? The services sector.

India’s growth in Q1 was broad-based across sectors, with services acting as the powerhouse. The services (tertiary) sector grew 9.3% YoY, a big jump from 6.8% a year earlier.

Within services, trade, transport & hotels grew 8.6% (up from 5.4% last year) and financial & professional services jumped 9.5% (vs 6.6% last year). Even public administration and defence rose 9.8%, aided by higher government outlays.

Essentially, domestic service industries are booming, ranging from finance to travel, reflecting a revival in consumer activity and government services.

Sectoral Composition of Nominal GVA in Q1 of FY 2025-26

Manufacturing and construction were strong, too. Manufacturing GVA rose 7.7%, slightly above its 7.6% growth last year, but still marking its strongest growth in five quarters.

These two sectors, closely tied to infrastructure and urban demand, nearly matched the services sector’s pace. They benefited from both public infrastructure projects and recovering private demand.

Agriculture (and allied farm sectors) grew 3.7% in Q1, a significant improvement from 1.5% growth in Q1 last year. Good Rabi harvest and timely monsoon rains supported farm output.

A 3.7% agri growth is supported by above-average rainfall this time, and it helped lift rural incomes.

Also, the Fast-Moving Consumer Goods (FMCG) sector benefited significantly from rural demand, with rural India accounting for nearly 45% of FMCG consumption. Companies reported stronger sales growth during the monsoon period, supported by:

Increased rural disposable incomes
Stable raw material prices from better agricultural output
Enhanced penetration in rural markets

Overall, the supply-side snapshot shows services soaring, industry recovering, and agriculture improving, a far more balanced growth profile than many expected.

Q1 GDP: Expenditure Side

Growth was broad-based across consumption and investment, though trade was mixed.

Private consumption ( ~60% of GDP) rose 7% YoY. Rural demand and better consumer sentiment drove this. Strong vehicle sales and air travel confirmed resilient consumption.

Government consumption grew 7.4% (real), a sharp rebound from last year’s muted spending, as outlays picked up post-election.

Investment climbed 7.8%, supported by higher government capex (up 50% YoY) and private capacity building. Cement and steel output signalled robust infrastructure and housing activity.

But net exports dragged growth. Exports rose 5.9%, but imports surged by ~11%, driven by oil and capital goods, which offset much of the external contribution.

Tariffs and Slowdowns

While the 7.8% growth is encouraging, it comes with important caveats. Here are the key risks and one-off effects to consider going forward:

External Headwinds (US Tariffs & Global Trade): A major risk looming is the 50% tariff imposed by the US on certain Indian imports since the end of August. Estimates had earlier suggested the tariff impact could shave off 0.3–1.0 percentage points from India’s annual growth if fully realised.

Despite the imposition, India demonstrated remarkable resilience. Q1 saw minimal impact (indeed, exports were frontloaded ahead of tariffs), but from Q2 onward, sectors like steel, aluminium, and consumer goods may feel the pinch of reduced US demand.

Global trade uncertainties and geopolitical tensions (oil prices, war impacts) remain a downside risk for India’s otherwise domestically driven growth.

Low Nominal Growth Implications: The flip side of low inflation is that nominal GDP growth (8.8%) is relatively low. Markets and policymakers will watch if an uptick in inflation (e.g., due to food prices or oil) occurs later in the year, which could boost nominal GDP but squeeze real incomes.

Monetary and Policy Response: With growth so strong and inflation so low, the RBI is unlikely to cut interest rates soon. Q1’s surprise has “doused expectations” of any immediate rate cut. Also, much optimism is pinned on the new GST simplification reforms to sustain growth.

However, so far, policy signals remain positive, with the government indicating it will counter tariff impacts and support exports through other measures.

Putting it all together, most economists expect growth to moderate in the coming quarters after this Q1 spike. Prudent investors and policymakers will keep an eye on how these external challenges play out for India.

Investor Takeaways: Navigating the Macro Trends

For investors, the GDP numbers reveal significant trends. Some are:

Domestic Demand Themes in Play: The strong showing by the consumption and services sectors highlights the potential in domestic demand-driven themes. Sectors like banking/financial services, consumer discretionary, and travel/hospitality are likely to benefit from India’s rising middle-class consumption. Similarly, rural recovery could boost companies in FMCG (fast-moving consumer goods), two-wheelers, and agro-inputs.

Infrastructure and Capex Push: Infrastructure, construction, and capital goods sectors stand to gain from continued public capex and eventual pickup in private capex. Investors could look at thematic opportunities in infrastructure development, such as portfolios focusing on construction materials, capital equipment manufacturers, logistics, and related industries.

Stay Diversified Amid Global Risks: A thumb rule to mitigate market volatility. Tariffs or global slowdowns remind us that even a domestically-driven economy like India isn’t immune to shocks. A well-diversified portfolio can weather external risks better while still capturing India’s growth story.

Don’t Chase the One-quarter Wonder: While the GDP print underscores India’s economic resilience, avoid getting carried away by a single data point. Q1’s drivers included some temporary boosts. Analysts expect growth to normalise to ~6-6.5% levels ahead. Investors should focus on the long-term trajectory, which remains positive, rather than quarter-to-quarter volatility.

To Wrap Up

The economy’s 7.8% leap is encouraging, but prudent investing means preparing for the journey ahead, with its twists and turns. It underlines the importance of staying informed on macro trends but also maintaining a balanced, long-term strategy.