There is considerable scepticism about these high growth rates, especially in the context of unprecedented global uncertainties and turbulence. This is visible in the seesawing oil prices; rising protectionism in major markets; a slowdown in the growth rate of world trade; and the ongoing conflicts that are sucking up major resources away from productive investment. 

Sectoral Performances

It is therefore useful to examine some sectoral performances which correlate or correspond to the GDP growth rate. For example, electricity consumption in Q1 of FY27 grew at 8.8% exactly as predicted by the long-term relationship between GDP growth and electricity consumption. Goods and Services Tax (GST) collections also achieved a healthy growth rate of 8.4% in the first quarter, increasing from ₹5.83 lakh crore to ₹6.32 lakh crore. This was certainly a result of the simplification in the GST rate structure announced in April this year. It is also remarkable that commercial bank credit to the industrial sector, which has been growing at a tepid 7% or so between 2014 and 2025, has surged to 15% in April and 19% in June 2026. 

Clearly, the industry’s capacity expansion and concomitant investment demand have suddenly been triggered, perhaps as another positive consequence of changes in the GST structure. Hopefully, the GST Council will draw the clearest lesson from this performance and further simplify the structure in its forthcoming meeting (on September 13). We must recognise the value and economic strength of having a simple, transparent and predictable GST rate structure and move decisively towards a single rate while exempting all necessary primary commodities from GST. The sooner we can do this and include energy and fuels within the GST ambit, the better. 

Welcome Surprise

The awakening of the animal spirits, as shown in a marked rise in commercial bank credit, is reaffirmed with the 11.8% growth in gross fixed capital formation in Q1 as compared to an anemic 5.8% in the same quarter last year. This is perhaps the most welcome surprise as the general expectation had been that investors would continue to remain shy in the face of the disturbed conditions in both global and domestic arenas. The investment-to-GDP ratio has, as a result, grown to a healthy 34%, and let us hope that this momentum will be sustained in the coming quarters as well. Fiscal prudence is evident in government final consumption increasing only by 4.5%.

However, the weak growth in private final consumption at 7.1%, lower than 7.8% in the previous quarter, should bring the policy focus even more sharply on ramping up our merchandise and service exports. An 8% plus GDP growth rate cannot be sustained without recourse to external demand and increasing India’s share in world merchandise trade flows. It is time, perhaps, to undertake a rigorous third-party evaluation of the performance of the sector export promotion councils, and restructure and redesign the incentive framework within which they operate. 

Manufacturing Growth

Manufacturing has improved upon its growth momentum by registering a 9.2% (year-on-year) growth in Q1 after having registered a growth of 7.3% in Q4 of FY 26. Capital goods output registered an increase of 15.2%, further reinforcing the evidence of a turnaround in corporate investment. The industry seems to be expecting a ramping up of demand as a positive outcome of the Free Trade Agreements (FTAs) and GST simplification.

The services sector, which accounts for as much as 55 % of the GDP, scored a 10% growth, contributing maximally (nearly two-thirds) to overall economic growth.

Agriculture growth weakened to a mere 3.6%. With the El Niño-induced monsoon shortfall in 47% of agricultural regions, we need to keep a sharp lookout for food price inflation, especially given that the prices of sugar and milk have already spiked in recent weeks. 

Inflationary Pressures

Emerging inflationary pressures could play spoiler. Nominal GDP growth came in at 10.3%, implying a GDP deflator of about 2.5%. This should not be confused with the RBI’s target rate of 4%, which is attached to the headline or core consumer price inflation. These have come in at 4.4% and 3.9% respectively in July 2026, with the headline inflation driven mainly by food inflation of 5.5%.

The rising food and commodities prices could strengthen the hand of inflationary hawks in the monetary policy committee of the RBI. This could well result in an early hike in repo rates to curb both consumption and investment demand before inflationary pressures get embedded in the economy. Let us hope that the RBI will allow consumers to have a good festival season with the resultant hype in consumption demand, which has shown weakness, before putting a damper on it by raising interest rates. That would imply a repo rate hike not in October but in December.

(The writer is an eminent economist and Chairperson, Pahlé India Foundation. Views expressed are personal.)