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1Q GVA growth at 7.6% YoY is an 80bp improvement vs. 4QFY25, and nearly 1pp above consensus and our estimates. Growth accelerated and surprised for both services and manufacturing; it slowed in agriculture and construction. As several real-world proxies for volumes in goods and services grew well below 7%, it is likely that issues with deflators and fiscal accounting may have temporarily boosted growth. Nevertheless, with better visibility of growth, as GST rate cuts (post re-stock starting Oct) can amplify the expected pickup in credit growth starting Nov/Dec-25, we retain FY26 growth forecast at 6.7%.
1Q GDP 1pp better than expected; estimate beset with methodological issues
India’s 1QFY26 GDP grew 7.8% YoY (Fig 2), 1pp above consensus and our expectations. The 80bp improvement in GVA growth vs. 4QFY25 (1Q at 7.6% YoY) was due to services (9.3% YoY) and manufacturing (7.7% YoY) both doing better. Manufacturing growth has been accelerating for three consecutive quarters due to base effects (Fig 8). Services growth accelerated sharply (Fig 6, 7) though the real growth may be overstated due to the use of an inappropriate deflator (Fig 12). Weak Agri growth (3.7% YoY) surprised on the downside.
Consumption growth trails investment growth; Pvt consumption up 7% YoY
As expected, investments continued to grow faster than private consumption, but fiscal accounting may have helped in 1Q. Further, aggregates are harder to explain via parallel proxies. In 1Q private consumption, fixed investments and govt. consumption were all reported as growing above 7%, and yet unexplained expenditures (discrepancies) were ~2% of GDP. Growth is well below 7% for nearly all volume proxies for goods (e.g., autos, FMCG, durables) as well as services: goods-related (retail, wholesale), real estate and financial were weak in 1Q; only a few like telecom had strong GVA growth.
We maintain our above consensus FY26 growth forecast at 6.7%
The end to growth downgrades we anticipated in Feb-2025 may now transition to mild growth upgrades. While a meaningful acceleration in credit growth and thence economic momentum maybe a quarter away, GST rate cuts raise its probability. Slower pace of fiscal consolidation in FY26 and macroprudential and monetary easing should support growth. 2Q growth may be adversely affected as the channel appears to be reluctant to hold inventory in categories seeing GST rate cuts, but subsequent restocking in 3Q should offset that in FY estimates. While a continuation of 50% tariffs on exports to the US is an overhang, we do not expect it to last long; at ‘normal’ tariffs, the impact would be insignificant.
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