India’s Q1 GDP stuns, but here are 5 startling contradictions you cannot ignore – Economy News

The Q1 GDP growth stunned everyone. At 7.8%, the growth exceeded most estimates by a very wide margin. Private consumption is one of the key triggers that helped growth surge close to the 8% mark. However, that’s not the real story. A closer analysis of the numbers indicates that the Q1 GDP performance is indeed a tale of multiple contradictions. 

Gaura Sengupta of IDFC FIRST Bank pointed out that “While the Q1FY26 real GDP print was significantly stronger than expected, it was also aided by transient factors which will wane in H2FY26.”

According to her, “The growth in the economy remains below potential. This is indicated by subdued core-core inflation, which has persisted since last year. Another indicator of a negative output gap is the low current account deficit for the last two years.”

5 big contradictions in India’s Q1 GDP performance

Let’s now take a closer look at the bigger story emerging from these numbers – the key contractions and how it is set to impact the next rate action from RBI –

1. Urban and rural consumption trends diverging

The overall Q1 outperformance was led by private consumption on the expenditure side and services sector growth on the value-added side. However, a closer look indicates divergent trends in rural and urban consumption trends. 

Rural consumption has likely picked up, supported by a rise in real rural wage growth. IDFC First Bank also highlighted that “other high-frequency indicators also confirm improvement in rural demand.” These include the likes of stronger FMCG sales growth and reduced demand for employment under NREGA. The report added that rural wage growth in real terms has also picked up, and this too supported rural demand.

However, in sharp contrast, urban consumption indicators were weak in Q1FY26. According to IDFC First Bank, “low single-digit FMCG sales volume growth, decline in vehicle sales growth and slowdown in electronic payments” are indicators of weakness in urban consumption. According to the report, this divergent trend is because urban wage growth continues to slow in real terms. 

2. Headline growth stellar Vs underlying transient factors and nominal growth

The headline GDP numbers no doubt stunned the street, beating most expectations. In contrast, the nominal GDP growth slows to 8.8% in Q1FY26 from 10.8% in Q4FY25. According to IDFC First Bank, “this divergent trend was due to a sharp slowdown in GDP deflator growth in Q1FY26, led by moderation in WPI and CPI inflation.”

 In fact, they pointed out that, “looking at the subdued direct tax collections, continued slowdown in listed companies’ sales growth and softer credit growth, there may be some merit in looking at nominal GDP growth rather than real GDP growth.”

The report by IDFC First Bank went on to explain that “the Q1FY26 GDP print got support from a few transient factors such as the peak supportive base effect, a sharp slowdown in the GDP deflator, the front-loading of exports to the US and the front-loading of government capex.”

They expect these factors to reverse in H2FY26. This, they believe, may result in a “drag on real GDP growth numbers. The GDP deflator growth is expected to pick up in H2FY26 with an expected rise in CPI and WPI inflation, led by the base effect.”

3. The real tariff impact a potential gamechanger?

IDFC First Bank goes on to elaborate how India’s exports to the US were front-loaded in H1FY26, when pause period tariffs prevailed. “Exports to the US were tracking higher by 21.8% YoY in FY26 so far (Apr-July). In H2FY26 the impact of the tariffs will become more visible on India merchandise exports as well as global trade,” they added.

According to them, the sectors at risk are labour-intensive, such as the list of SME sector companies, which account for 46% of India’s overall merchandise exports. As per their calculations, “If a 50% bilateral tariff persists till March 2026, the drag on FY26 growth is estimated at 0.4%. The actual impact could be higher, as certain labour-intensive segments may stop exporting given already thin margins.” Moreover, they also expect “second-round effects, with global trade activity also expected to be weaker in H2FY26.”

4. Significant contribution of discrepancies in high GDP numbers

The other striking aspect about the Q1 performance is the significant contribution of discrepancies. The discrepancies “contributed 1.8 percentage points positively to overall headline GDP growth. This figure captures growth which is not accounted for by consumption, investment or trade,” IDFC First Bank added. 

According to them, this large contribution of discrepancies (both positive and negative) has persisted post Covid-19, underscoring the limited availability of data on the expenditure side.

This essentially means a significant part of this key growth number lacks clarity in terms of the growth drivers within the standard components. 

5. Manufacturing growth Vs nominal sales

On the industry side, manufacturing growth was higher at 7.7%. According to IDFC First Bank, this reflects “a rise in profit growth of listed companies as input costs moderated.” However, the “sales growth of manufacturing sector companies has continued to slowdown in Q1FY26 at 5.3% (nominal growth) vs 6.6% in Q4FY25,” they pointed out. 

They further reiterated that “the slowdown in GDP deflator growth was another factor which supported real growth rates.”

How will growth pan out in H2FY26, and when will RBI cut rates next?

All these factors highlight the imbalances in growth components and the factors that have contributed towards a temporary boost in the GDP numbers. But is this sufficient to support the economy in the second half of FY26? 

As a result of these contradictions, IDFC First Bank is maintaining the call “for one more 25 bps rate cut by RBI,” despite the stellar GDP print. They believe that “the probability of a cut is higher in December rather than October, as RBI may want to see the impact of fiscal measures as well as clarity on tariff impact.”

IDFC First Bank highlighted that there are some tailwinds to growth in H2FY26 as well. These include the proposed GST cut and rural demand. “The proposed GST cut, if implemented by October 2025, is estimated to push up growth by 0.3% in FY26. Rural demand, which is showing signs of revival with a pickup in wage growth, will get support from robust Kharif and Rabi harvests,” they added.

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