Despite a strong Q1 showing, risks are on the upside, thanks to geopolitics and geo-economics

A little over a fortnight after Independence Day, the National Statistical Organisation (NSO) on Monday gave us another reason to cheer. According to it, GDP - or the money value of goods and services produced within the country, valued in constant prices - grew at a better-than-expected 7.8% during Q1 of the current fiscal (April-June 2026).

This follows a similar better-than-expected growth of 7.8% in the previous quarter, an upwardly-revised 6.9% during the comparable quarter of the previous year, and way higher than RBI's estimate of 7%. All this, despite inclement external environment. Which suggests that the word 'resilient', favoured by Sanjay Malhotra and Nirmala Sitharaman to describe the Indian economy, may not be misplaced.

Barring adverse developments in the following quarters, chances are we will end the current fiscal (2026-27) with growth above 7%, higher than RBI's estimate of 6.7%, ensuring India remains among the fastest-growing major economies. To put that in perspective, the US economy grew 1.5% during the same period, Britain's grew far slower at 0.4%, while China, long envied for its double-digit growth, grew only 4.3%. Emerging market economies put in a better show - Vietnam 8.39%, Malaysia 6%, Singapore 5.9%, Indonesia 5.3%, and Thailand and the Philippines both 2.3%.


Of course, size of the US economy at $32.38 tn dwarfs India's $4.15 tn, as does China's at $20.85 tn. Nonetheless, there's much to cheer in the overall and dis-aggregated numbers. For starters, growth in gross value added - GDP less taxes plus subsidies - that many economists regard as a better indicator of performance, is 8.2%.

Employment-intensive sectors like manufacturing, trade, and hotels and construction have also done well with growth in Q1 at 9.2%, 8.5%, and 7.7%, respectively. The only jarring note comes from the mining and quarrying sector, another employment-intensive sector, that contracted 2.4%. And the lower-than-anticipated growth in GDP in nominal terms (10.3%), presumably due to NSO using the improved double-deflation method (where input and output prices are deflated separately) to arrive at the number.

On the expenditure side, there's a welcome rebalancing of different components. Growth in government consumption expenditure that had long held up overall consumption is finally down to a moderate 4%, even as expenditure on fixed capital formation and on private final consumption is up 11.9% and 7.1%, respectively.

For a dataset that's really a report card of the past, which gets routinely revised, and in today's chaotic times, cannot be taken as a guide to future economic growth - at least as long as Donald Trump is US president - quarterly estimates of GDP growth still evoke interest. Part of this reason is that, as Churchill once said about democracy being 'the worst form of government, except for all the others', GDP growth, for all its shortcomings, remains the worst measure of a country's economic health, except for all the others.

With that caveat in mind, if we look beyond the immediate GDP numbers, what are the positives?

Strong loan growth estimated in the range of 18-19%, with the earlier skew in favour of personal loans shifting increasingly to corporate loans. According to RBI's latest State of the Economy report, momentum in manufacturing and services activity seen in the first quarter continued in July.

Robust corporate top- and bottomlines, suggesting the underlying growth momentum remains strong with both consumption and manufacturing engines fuelling growth.

Sharp increase in gross fixed capital formation from 5.8% in the comparable quarter in the last fiscal to 11.9% in Q1 FY27.

Likelihood that the on-again-off-again 'ceasefire' in West Asia will eventually result in a cessation of fire, with the approach of US midterm elections in November.

But not everything is hunky-dory.

We are facing the worst El Nino in decades. Progress of the southwest monsoon has been erratic and uneven. Though the shortfall at the national level is only about 13%, the spatial distribution shows the deficit is much more in major foodgrain-producing states.

The continued impasse in the conflict in West Asia and the resultant high price of oil. Given India's overwhelming dependence on imported oil, it's only a matter of time before elevated energy prices, combined with a weaker rupee, translate into higher inflation. (It would be naive to assume the strong inflows - estimated at close to $80-85 bn - due to RBI's concessional swap window for FCNR(B) deposits, will be able to offset the underlying rupee weakness.)

Distinct possibility of an uptick in inflation, thanks to the huge liquidity overhang on account of the better-than-expected response to the FCNR(B) scheme as RBI mops up dollars in exchange for rupees.

On balance, where does all this leave us? With a sobering thought. Despite the economy's strong showing in Q1, risks are on the upside. Thanks to geopolitics and geo-economics.