India’s economy grew at a surprisingly strong annual pace of 7.8% in the April–June quarter, far outstripping many forecasters and underlining the country’s role as a global growth engine. The print, led by brisk services activity, resilient manufacturing and a booming construction sector, comes as a shot of confidence for policymakers and investors. But the celebrations are muted: punitive U.S. tariffs that recently took effect are already casting a shadow over export-sensitive industries and prompting economists to trim full-year forecasts by several tenths of a percentage point.

A closer look at the numbers shows why the quarter looked so robust. Services expanded markedly, manufacturing posted healthy gains and construction continued to expand at a double-digit-like pace. At the same time, the price deflator came in softer than in prior quarters, making “real” output growth look particularly strong even as nominal growth moderated. Taken together, these elements created a snapshot of an economy firing on multiple cylinders — at least before trade frictions intensify.

Domestic demand, investment and the deflator effect

Domestic demand was the key engine behind the surprise. Household consumption picked up, supported by rising incomes and a still-resilient labour market, with spending on services — travel, hospitality, finance and professional services — showing particular strength. Robust consumer activity fed into higher utilisation across retail and services firms, helping private consumption deliver a solid contribution to growth.

Investment was also a notable contributor. Capital formation rose as businesses expanded capacity and state and private construction projects kept crews busy. The construction sector’s continued expansion, visible in both residential and commercial megaprojects, added to job creation and upstream demand for steel, cement and machinery. Infrastructure spending by central and state governments — roads, rail projects, energy and urban development — remained a stabiliser, sustaining demand for materials and contract services.

An important technical element that amplified the headline figure was the GDP deflator, which was relatively soft in the quarter. Lower price pressures in some goods categories meant that nominal GDP grew more slowly than real GDP, making the real growth rate appear outsized. In plain terms, when price measures cool, the same nominal expenditure translates into higher real output growth. Economists caution that such a mechanical boost can overstate the underlying momentum if price dynamics reverse.

Manufacturing and services: balanced drivers

Manufacturing grew strongly, reflecting improving corporate earnings, higher utilisation, and continued foreign and domestic investment in industrial capacity. Export-oriented factories had benefited earlier in the year from trade front-running and restocking, while domestic demand for durable goods held up, supporting factory output. At the same time, some manufacturers reported margin pressures as input costs and logistics remained volatile, but overall production contributed positively to the quarter’s expansion.

Services were the standout, delivering the largest incremental growth contribution. Information technology, financial services, telecommunications and the leisure sector recorded healthy activity levels. The expansion in services is meaningful because it tends to be less volatile than goods trade and more directly tied to recurring domestic income streams. Higher value-added services also underpin productivity gains and provide higher-paid employment, contributing to a virtuous cycle of consumption and investment.

The combination of manufacturing and services strength helps explain why the quarterly surge was broader-based than many had expected; it was not merely a one-off rebound in any single sector but a co-ordinated improvement across the economy.

Tariffs bite: revisions to the growth outlook

The upbeat print does not eliminate new downside risks. The recent U.S. decision to raise duties on a wide range of Indian goods — bringing effective rates on some categories to roughly 50% — has immediate and direct implications for labour-intensive export industries such as textiles, footwear, gems and jewellery, and certain chemicals and furniture lines. The shock to competitiveness is likely to depress export volumes, reduce factory orders and reverse some of the near-term gains in manufacturing that helped drive the quarter’s surprise.

Forecasters are already adjusting their full-year projections. Analysts point to a likely hit in the range of roughly 0.6 to 1.0 percentage point off headline GDP growth for the fiscal year if tariffs persist and retaliation or market re-routing do not fully offset lost U.S. demand. That would bring consensus forecasts for growth down from the 7% area that many had pencilled in before the tariffs, toward a 6.3–6.8% range for the year — a meaningful slowdown from the quarter’s 7.8% print. Multilateral institutions and private economists differ on the magnitude, but most agree that the tariffs materially raise downside risks.

The currency and financial channels amplify the pain. The rupee fell sharply after the tariff announcement, briefly breaching record lows, and foreign portfolio outflows intensified as global investors reassessed exposure. Currency weakness raises the domestic cost of imported inputs for firms that cannot easily pass on costs, squeezing margins and potentially slowing investment. Meanwhile, tighter external financing conditions can raise borrowing costs for corporates and weigh on consumer sentiment.

Policy levers and potential offsets

India’s policymakers have tools to cushion the blow, and some moves are already evident. The central bank cut its policy rate earlier in the year to support growth when inflation showed signs of easing; monetary easing or liquidity support remains on the table if the economy cools sharply. Fiscal policy could also provide targeted relief: authorities can accelerate infrastructure projects, step up export support measures, and offer sectoral assistance to affected firms to preserve jobs and capacity.

Moreover, India can seek to diversify export destinations and look to replace lost U.S. demand through regional and African markets, though this re-orientation takes time. Supply-chain reconfiguration and trade diplomacy could blunt some impact, and the longstanding competitiveness of Indian services—especially IT and business process outsourcing—may continue to provide a steady source of foreign exchange even as goods exports wobble.

In the near term, the question is whether the strong momentum seen in the April–June quarter can be sustained through weaker external demand and tighter trade ties with a major partner. If domestic demand and investment remain resilient, the economy could still post decent growth in the coming quarters despite headwinds. But if export losses cascade into layoffs and investment pullbacks, the drag could be larger and more persistent.

Markets will be watching several indicators closely: export volumes and orders from the U.S., rupee stability, consumer confidence, corporate capex plans, and incoming data on employment and factory utili- sation. How quickly monetary and fiscal authorities respond, and how effectively businesses find alternative markets or cost structures, will determine whether the 7.8% figure becomes a springboard or a bright but brief peak.

For now, India’s June-quarter surprise underscores the economy’s underlying strengths — a large domestic market, robust services activity, and active public investment — while also highlighting vulnerabilities to sudden external shocks. The recent tariff shock does not erase the quarter’s good news, but it makes the path ahead bumpier and has forced forecasters to temper their expectations for the year.

(Adapted from CNBC.com)

Categories: Economy & Finance