GDP growth records bumper reading in April–June

GDP reading: Annual GDP growth accelerated for the third consecutive quarter to 7.8% in April–June, up from 7.4% in the prior three months, significantly topping market expectations and marking the best result in a year. However, the reading was flattered by a statistical quirk, as the GDP deflator—which is used to strip out the effect of changes in prices—was distorted by recent food cost volatility. Economists at Goldman Sachs estimate that the true April–June reading may have been up to 0.5 percentage points lower with a corrected GDP deflator. This implies that India remains the fastest-growing large economy, but is not growing at the breakneck speed suggested by the GDP figures.

Drivers: On the plus side, private consumption increased 7.0% in April–June, up from January–March's 6.0% expansion. Spending in rural areas continued to be supported by recently strong harvests, while nationwide spending benefited from central bank interest rate cuts and government income tax reductions. Moreover, public consumption rebounded, growing 7.4% (January–March: -1.8% yoy). Less positively, fixed investment growth waned to 7.8%, following 9.4% logged in the prior quarter. Moreover, net exports contributed negatively to GDP for the first time in five quarters, with stronger Indian consumer demand leading imports of goods and services to bounce back 10.9% (January–March: -12.7% yoy). This more than offset an acceleration in the growth of exports to 6.3% (January–March: +3.9% yoy), with shipments likely weighed on by U.S. tariffs.

GDP outlook: In the coming quarters, GDP figures will continue to be flattered by the GDP deflator, which has led our panelists to raise their forecasts for economic growth this fiscal year. This should help cement India’s status as the world’s fastest-growing large economy, with other drivers including cuts to income tax, the recent rationalization of the main consumption tax, healthy harvests thanks to a favorable monsoon, and reductions in interest rates by the central bank. That said, U.S. tariffs are likely to drag on exports, and strong Indian consumer demand will swell imports, meaning net trade will perform relatively poorly in the coming quarters.

Panelist insight: Nomura’s Aurodeep Nandi and Sonal Varma said: “Our view on the economic cycle remains unchanged, but given the higher Q2 GDP, we are statistically revising our FY25 GDP growth forecast to 6.6% (from 6.0%). This implies average growth of 5.8% y-o-y in H2 FY25 versus 7.6% in H1 FY25.” Goldman Sachs also raised their forecasts for GDP growth this fiscal year, but flagged the hit from U.S. tariffs: “We had previously estimated a direct impact of around 0.3pp (annualized) to India's real GDP growth, following President Trump's surprise announcement of 25% "reciprocal" tariff on Indian imports. With the subsequent implementation of the additional tariffs, we now estimate a further drag of around 0.6pp (annualized) on real GDP growth.”

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