Services power a five-quarter high as India outruns forecasts in Q1 FY26

India’s first fiscal-quarter scorecard landed decisively in the “beat” column. Real GDP grew 7.8% year over year in April–June, comfortably topping an already solid 7.4% in the prior quarter and exceeding economist expectations centered near 6.7%. The print reinforces a theme that has defined India’s recent cycle: a domestic engine—led by services and investment—more than compensating for a complicated external setting.

The anatomy of growth shows why. Services were the difference-maker, advancing roughly 9% from a year earlier as mobility-intensive categories (trade, hotels, transport) and white-collar segments (financial and public services) stayed busy. Industry contributed as well. Manufacturing output rose in the high-7% range, helped by improved input availability and steadying demand, while construction cooled from earlier double-digit peaks but remained robust at about 7½%. Agriculture’s near-4% pace added a modest tailwind, though the monsoon’s distribution and food-price dynamics will shape the rest of the year.

From the spending lens, government consumption rebounded and fixed investment maintained momentum, leaving households to play a steadier, less flashy role. Private consumption increased but no longer runs red-hot, in line with a welcome downshift in inflation—headline retail price gains slid toward the mid-1% area in July. That disinflation trims nominal growth but boosts real purchasing power, offering a cushion if sentiment wobbles.

Two policy signposts frame the outlook. First, the Reserve Bank of India kept its policy rate on hold at 5.50% and is penciling in roughly 6½% growth for FY26, a path consistent with gradual normalization rather than a re-acceleration. Second, the U.S. tariff shock—doubling duties on a swath of Indian goods to as much as 50%—introduces a clear downside risk for export-heavy, labor-intensive sectors. Delhi has flagged targeted relief and potential tax steps to sustain demand and employment; how quickly those filters reach firms will matter for capex plans and hiring.

On levels, the quarter’s real GDP at constant prices climbed to roughly ₹47.9 lakh crore, with real GVA up about 7.6%. The composition—services-heavy, investment-supported—suggests India can remain a growth outlier even if global trade softens, though the glide path likely cools from Q1’s pace as tariffs, slower external orders, and base effects reassert themselves.

Beyond India, the international tape on Friday offered mixed signals. Tokyo’s August inflation eased but remained above the Bank of Japan’s 2% goal, and earlier data showed July factory output contracting—evidence of a fragile Japanese recovery. In Europe, Germany’s August inflation reading appeared a touch firmer on state prints ahead of the euro-area flash, complicating the near-term debate over how quickly the European Central Bank can ease. Those cross-currents underline the same point India’s numbers illustrate: domestic composition matters. With services still carrying the load and public capex in gear, India begins FY26 with more running room than most—but also with fresh headwinds to navigate.