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Informist, Friday, Aug. 29, 2025

 

By Shubham Rana

 

NEW DELHI – India's GDP in Apr-Jun might have grown much quicker than projected, including by the Reserve Bank of India, but the headline print masks a slowdown in economic activity. The latest data set also does little to alleviate concerns about the impact of US tariffs on India's growth, economists said.

 

Data released Friday showed India's GDP growth rose to a five-quarter high of 7.8% in the June quarter. Growth was much higher than the 6.7% projected by economists in an Informist Poll. It was also 130 basis points higher than the RBI's forecast of 6.5%.

 

Even the growth in gross value added, which many economists consider a more reliable indicator of economic activity than GDP, rose to a six-quarter high of 7.6% in the June quarter. Growth was driven by the services and manufacturing sectors, but, more importantly, by the statistical effect of lower inflation.

 

Nominal GDP growth, which is measured at current prices, fell to a three-quarter low of 8.8% in the June quarter from 10.8% in the March quarter. The difference between nominal GDP growth and real GDP growth was 100 bps in the June quarter, the lowest since the September quarter of the financial year 2019-20 (Apr-Mar) and significantly lower than the historical average of 470 bps.

 

"I would not read too much into this print, into growth being this strong," Abhishek Upadhyay, economist at ICICI Securities Primary Dealership, said. "Nominal growth is much weaker at 8.8%, which is a better metric to look at. Second, things have changed so much since the first quarter and downside risks to growth have increased."

 

Upadhyay said he had expected real GDP growth of 6.3% in FY26 but now growth could well be 6.5% or even higher, propped up by the impact of low inflation. He expects nominal GDP growth to be around 7.5-8.0% in FY26, against the government's assumption of 10.1% in the Union Budget. "That means optically real growth may look stronger compared to the nominal growth in this period. Nominal growth is a better metric to look at and is more consistent with high frequency data."

 

The high real GDP and GVA growth are "clearly at odds" with high-frequency activity indicators and corporate earnings, which continue to weaken, economists at ANZ Banking Group said in a report. Statistically, the headline print alone is enough to consider raising growth forecasts for the financial year from the current 6.1%, ANZ's economists said, adding that they don't expect growth to stay at such high levels during the rest of the year.

 

With 7.8% growth in the June quarter, RBI's growth forecasts for FY26 would be 6.9%, assuming forecasts for the remaining three quarters remain unchanged. The RBI projects GDP growth of 6.5% in FY26, with Jul-Sept growth seen at 6.7%, Oct-Dec at 6.6%, and Jan-Mar at 6.3%.

 

Chief Economic Adviser V. Anantha Nageswaran Friday said the government will retain its GDP growth forecast of 6.3-6.8% for FY26 for now. "... while we should acknowledge the downside risk, I think it is not necessary to expect it to be of a very significant nature," Nageswaran told reporters at a briefing after the release of the June quarter GDP data.

 

The biggest downside risk to growth comes from the impact of 50% tariffs imposed by the US. Economists estimate a hit of nearly 50 bps to growth from the tariffs, if they continue.

 

The US Wednesday imposed a punitive 25% tariff on imports from India for New Delhi's continued purchase of crude oil from Russia. The additional levy takes the total tariff on Indian goods to 50%, which will affect nearly 55% of India's exports to the US, worth almost $50 billion. This includes sectors such as chemicals and fertilisers, textiles and apparel, gems and jewellery, shrimp and seafood, furniture and beddings, and machinery and mechanical appliances.

 

Although exporters had hoped that a trade deal with the US would insulate Indian exports from reciprocal tariffs, New Delhi and Washington are yet to resolve their differences over the US demand for access to India's politically and socially sensitive agricultural and dairy sectors.

 

The need for stimulus support for exporters, especially in tariff-affected sectors, is urgent, Kanika Pasricha, chief economic adviser at Union Bank of India, said. "When we look at the need for a proper fiscal and monetary package, it is very high. It can't be just government guarantee schemes or credit guarantee schemes, but a wholesome package, including direct fiscal and liquidity support to affected sectors, guarantee schemes, credit restructuring, among others," she said.

 

A big support to growth could come from the proposed overhaul of the goods and services tax regime, with the government looking to reduce the number of rate slabs to two--5% and 18%--from the current four, which includes 12% and 28%. Upadhyay said lower GST rates could boost growth by around 0.5%.

 

Another buffer for the economy against a hit from US tariffs would be the 100-bps of interest rate cuts carried out by the RBI's Monetary Policy Committee. While the rate-setting panel left the repo rate unchanged at 5.50% on Aug. 6, economists see scope for another rate cut in the December quarter.

 

"A rate cut in October right now appears a low probability," Pasricha said. "Our baseline view is of another 25-50 basis points rate cuts in the coming quarters. Meanwhile, the timing may get affected. We were always saying that the timing is contingent upon when the growth fault lines clearly appear in terms of a slowdown in data."

 

Upadhyay said it is important for policymakers to get a sense of underlying growth right rather than the headline number. "RBI, I think, will continue to be wary about growth turning weak in the back half of the year from various risk factors," he said.  End

 

Edited by Rajeev Pai

 

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