First things first. To say that India’s first quarter GDP growth rate of 7.8 per cent surprised all would be an understatement. Growth was driven by strong performances in services, manufacturing, and construction, alongside significant government spending and solid private consumption. This robust start means that even a more moderate growth rate of around 6 per cent for the remaining quarters would nudge the eventual 2025-26 numbers closer to the RBI’s estimate of 6.5 per cent and help absorb some potential external shocks. At the same time, it must also be acknowledged that the first quarter numbers, however robust, don’t provide clues with respect to the adverse impact of US tariffs on the economy.
One must not get too carried away by the numbers, given the role of some technical bump ups by way of the base effect which contributed 40 basis points to the GDP growth or even the upward statistical push from an unusually low GDP deflator, which is a measure of price changes calculated via a weighted average of retail and wholesale price levels. The deflator at 0.9 per cent was one of the lowest outside the Covid years. The decrease in overall prices statistically boosted the real output calculation, making the headline growth number appear stronger than it actually is.
The first quarter numbers, while robust, might actually be the ceiling when it comes to growth for the next few quarters. Growth is projected to trend lower from hereon during the fiscal year. The RBI’s projection stands at 6.7 per cent for the second quarter, 6.6 per cent for the third and 6.3 per cent for the fourth. Most forecasters have a similar trajectory penciled in. Note, the outlook for the rest of the year remains uncertain due to first- and second-order impact of tariffs and the uncertainty around a trade deal with the US. Importantly, it also masks some of the domestic risks such as tepid credit growth and risk of deferred demand across categories in anticipation of GST rate cuts.
While real growth surprised on the upside, the moderation in inflationary pressures led to a low nominal GDP growth of 8.8 per cent which isn’t surprising, as it perfectly mirrors the drop in inflation. But this slowdown has several important knock-on effects for the government’s finances and the broader economy.
First, it imparts more pressure on the government’s fiscal position. The 2025-26 budgetary assumption is that of 10.1 per cent nominal growth which is now only growing at 8.8 per cent and hence the “economic pie” is smaller than expected. Key targets, like the fiscal deficit, are measured as a percentage of this pie. Since the pie is smaller, the deficit percentage automatically gets bigger, putting the budget targets under strain.
Second, it can weigh on tax collections given that lower inflation means that the prices of goods and services aren’t rising much. When things cost less, the government collects less in taxes. Add to that the possibility of GST rate cuts or rationalisation. This fall in expected tax revenue means less money for the government to spend on public services, infrastructure, and other projects.
Third, it can lead to slower credit growth. With slower nominal growth, we can expect credit growth to slow down as well, which can further dampen economic activity. It will be important to see how the RBI sees and interprets this data and what action it decides to take.
Fourth, the pressure on corporate top-line growth. Lower nominal growth could weigh on listed corporate top-lines and earnings even as some of the sectors may already be facing the brunt of US tariffs.
But why is there such a discrepancy between the Q1 GDP and the rather lukewarm corporate earnings numbers and commentary, or even the high-frequency data?
Well, the low deflator inflates real GDP growth relative to nominal growth, creating a perception of stronger economic expansion than what corporations experience in revenue terms. Corporate earnings, tied more closely to nominal growth, may not reflect the same buoyancy as real GDP, as pricing power remains constrained by low inflation.
Also, the 50 per cent US tariffs imposed on Indian exports, effective August 27, 2025, prompted frontloading of exports. However, this is a transient effect, and the subsequent tariff impact could dampen corporate performance in export-oriented sectors in later quarters.
Moreover, GDP is a macro measure aggregating value-added across sectors, while corporate earnings reflect specific firm-level performance. Discrepancies arise due to differences in accounting and the exclusion of non-corporate contributions from listed company results.
Further, the GDP figure was also boosted by frontloaded government capital expenditure. High-frequency indicators like PMI or freight data may not fully reflect this public spending surge, as they are more sensitive to private sector activity.
Gauging underlying growth trends is always tricky, but will be more so this year with tariffs and proposed GST cuts in play.
The writer is Group Chief Economist, L&T. Views personal
