India’s Q1 FY26 GDP Grows 7.8%: Services Lead, Tariff Risks Ahead

"India’s real GDP grew 7.8% in Q1 FY26 (April–June 2025) - well above the 6.5%–6.7% consensus - driven by a rebound in domestic output and a services-led surge (defence, public utilities, financial services >9%), while export-facing segments stayed soft. Tariff and rupee headwinds are likely in Q2–Q3."

In short: A stronger-than-expected print powered by domestic services today, with tariff and currency risks to watch tomorrow.

In One Minute

Q1 FY26 GDP printed 7.8% vs 6.5%–6.7% expected on the back of resilient domestic demand and a sharp services rebound (>9% in key sub-sectors). Primary and secondary sectors supported, though export-linked pockets stayed weak. Q2–Q3 risk lens: delayed tariff impact (25%/50%), INR depreciation weighing on USD-terms GDP, and ~$50 bn US-bound exports at risk.

Key Takeaways

• Beat: The 7.8% surprise came from domestic orientation, not exports.
• Services = engine: With ~65% share of GDP, services strength did the heavy lifting.
• Next risk phase: Tariffs + INR slide could soften momentum into Q2–Q3.

Key Numbers (Q1 FY26, Apr–Jun 2025)

• Real GDP growth: 7.8%
• Consensus: 6.5%–6.7%
• Services share of GDP: ~65%
• Agriculture: 3.7% (almost 2x vs Q1 FY25)
• Mining & quarrying: Contraction
• Manufacturing: >7%; Construction and Power healthy
• Services sub-segments >9%: Defence, Public utilities, Financial services

What Surprised the Street

Forecasters expected tariffs and export softness to weigh on growth. Instead, domestic-oriented sectors outperformed and services rebounded sharply. The tariff impact appears lagged, likely to surface more fully in Q2–Q3, leaving Q1 as a window where internal demand outpaced external drags.

Sector Deep-Dive

1) Primary sector

• Agriculture 3.7%: nearly double last year’s pace for the same quarter; supports rural consumption.
• Mining & quarrying: contraction offset some primary gains; watch commodity and permitting cycles.

2) Secondary sector

• Manufacturing >7%: a clear rebound that supported jobs and sentiment.
• Construction & Power: healthy momentum; infrastructure and housing continue to underpin activity.
• YoY lens: not as strong as last year’s base, but still kept the growth flywheel turning and fed demand into services.

3) Tertiary (Services) — the big story

• Core drivers >9%: defence, public utilities, and financial services.
• Why it mattered: Services form ~65% of GDP, are largely domestic, and were mostly immune to tariff frictions in Q1—amplifying their positive multiplier into employment, credit, and consumption.

Compact Sector Table

Why It Matters

• Breadth tilts domestic: Export-facing pockets stayed soft, but home-market momentum carried the quarter.
• Services multiplier: With ~65% share, services strength propagates into jobs, credit demand, and consumption.
• Secondary’s scaffolding: Manufacturing, construction, and power stabilised the cycle and fed service activity.

Risks & the Road Ahead (Q2–Q3 Watchlist)

• Tariffs (25%/50%): The real output/trade impact is likely to show up more in Q2–Q3, potentially weighing on both goods production and linked services.
• INR depreciation: Negative terms of trade have pressured the rupee, which dilutes GDP in USD terms and may raise imported inflation risks.
• ~$50 bn exports to the US at risk: Potential downstream hits to output, jobs, household purchasing power, and bank NPAs.
• Offsets to seek: Continued services resilience, steady domestic demand, and targeted policy cushioning exposed sectors.

What to Track Next

• High-frequency prints: PMI (manufacturing & services), power demand, e-way bills, GST collections.
• External & FX pulse: Trade balance, export order books, INR trend.
• Domestic impulse: Bank credit growth, rural wages, urban employment intent.
• Official releases: Next MoSPI quarterly GDP schedule and revisions.

Conclusion

India’s 7.8% real GDP growth in Q1 FY26 was a clean beat driven by domestic services and supportive secondary activity. The next two quarters will test how well this momentum holds as tariffs bite and the rupee’s slide filters through to costs and USD-terms metrics. If services stay firm and domestic demand remains steady, growth can hover near a 7% handle; a sharper export hit or deeper FX pass-through would challenge that baseline. For investors and policy watchers, the message is simple: watch services breadth, tariff transmission, and the rupee.

FAQs

1. What drove India’s 7.8% GDP growth in Q1 FY26?

A rebound in domestic output - especially services (defence, public utilities, financial services >9%) - and supportive manufacturing, construction, and power, while export-linked segments stayed soft.

2. Why didn’t tariffs dent Q1 growth?

The lagged impact of 25%/50% tariffs likely shifts to Q2–Q3. Many leading services are domestic and were largely immune in Q1.

3. Which sectors did best - and why?

Services were the standout due to domestic demand and less exposure to trade frictions. Manufacturing topped 7%, with construction and power also healthy.

4. How could the rupee’s fall affect GDP in USD terms?

An INR depreciation reduces nominal and real GDP measured in dollars, even if rupee-terms growth holds, and may add imported inflation risk.

5. What’s at stake with ~$50 bn of exports to the US?

A slowdown here could hit output, jobs, household purchasing power, and push bank NPAs higher in exposed pockets.

6. What indicators should I follow before Q2–Q3 data?

PMIs, power demand, GST, e-way bills, INR and trade prints, plus credit growth and rural wages for domestic pulse checks.

Disclaimer: This material is for information only and is not a recommendation, research, or solicitation. Please evaluate independently or consult a licensed professional.