Endurance test: On the Indian economy’s resilience

India’s economic growth during the first quarter of this financial year has surprised most people. Against a perception among economists that growth would slow to about 6%-7% on account of the impact of the West Asia crisis, real growth in the April-June 2026 quarter came in at a robust 7.8%. This was not a statistical anomaly, either, as growth was underpinned by strong performances in both manufacturing and services. In fact, the manufacturing sector grew at a three-quarter-high of 9.2%. The sector has likely benefited from the Goods and Services Tax rate cut implemented last September, and further from the Reserve Bank of India’s (RBI) 125-basis point cumulative interest rate cuts through 2025. A part of it is also that companies likely front-loaded their output in the expectation of further uncertainty on inflation, potential future rate hikes, and other possible headwinds. The other piece of good news is that capital creation seems to have picked up. While it is not yet clear what the share is between the government and the private sector, capital creation overall has a welcome multiplier effect on the economy. The services sector, too, has continued to see robust growth, adding strength to the economy. Yet, the economy is not out of the woods, and this robust performance will be more difficult to replicate in the quarters ahead. As Chief Economic Adviser V. Anantha Nageswaran has cautioned, Hormuz uncertainty is likely to keep oil prices above $80 a barrel, too high for a country that imports 85%-90% of its oil requirement.

This is perhaps why Prime Minister Narendra Modi on Tuesday reiterated his appeal to Indians to buy local, avoid non-essential foreign travel and weddings abroad, and stop unnecessary purchases of gold. The pressure of maintaining a reasonable trade deficit has so far rested on India’s services exports. This has served India reasonably well so far, but the global economy is stuttering. This, combined with the growth of Artificial Intelligence services elsewhere, could hurt demand for Indian services exports going ahead. The economy is also yet to face the full brunt of a deficient monsoon and the impact this will have on rural demand. The consumption-related data for July in the Index of Industrial Production already points to sluggish rural demand. While inflation remains well within the RBI’s comfort zone, it has been increasing. The RBI expects it to hit 5.9% in October-December 2026, which would further hit demand. The front-loading of manufacturing will also, by definition, peter out over the next few quarters. The strength of the Indian economy’s resilience was tested in Q1 and it passed admirably. However, the much tougher stamina test remains.