GDP growth zooms to 7.8% in June quarter from 6.5% a year ago

Earlier this month, on August 6, the Reserve Bank of India (RBI) had forecast GDP growth to edge lower at 6.5 per cent in April-June. While economists from outside the central bank also expected growth to come in below the 7.4 per cent recorded in January-March, they broadly saw the figure closer to 7 per cent.

Addressing reporters in a briefing, Chief Economic Advisor V Anantha Nageswaran expressed optimism about the government’s growth forecast of 6.3-6.8 per cent GDP growth for the current financial year despite the concerns caused by the 50 per cent US tariff.

“Obviously, there is some uncertainty with respect to the duration of the period for which the additional tariff related to Russian crude oil purchase would last. But in general, the conversations are going on and there is an expectation that we will see some kind of a resolution in the not-so-distant future… Of course, the downside risk is there in case the tariff impasse remains for a longer period. But we are hopeful that that will be resolved sooner rather than later,” Nageswaran said.

Services activity zooms

The sharp pick-up in growth in April-June was on the back of services sector growth hitting a two-year high of 9.3 per cent. High-frequency data since the start of July is indicative of continued robust growth in the services sector, with non-official data released last week showing the HSBC Flash India Services Purchasing Managers’ Index rose to an all-time high of 65.6 in August from 60.5 in July.

The rise in services growth in April-June was aided by a broad improvement in all three components. While growth in Gross Value Added (GVA) of ‘Trade, Hotels, Transport, Communication & Services related to Broadcasting’ increased to 8.6 per cent from 6 per cent in January-March and 5.4 per cent in April-June 2024, ‘Financial, Real Estate & Professional Services’ posted a GVA growth of 9.5 per cent, up from 7.8 per cent in the previous quarter and 6.6 per cent a year ago. Meanwhile, at 9.8 per cent, the GVA of ‘Public Administration, Defence & Other Services’ grew even faster.

On the whole, GVA growth – seen as a more meaningful measure of activity levels – in April-June was at a six-quarter high of 7.6 per cent in April-June. GVA is arrived at by subtracting net indirect taxes – indirect taxes after adjusting for subsidies – from the GDP. In April-June, net taxes were 10.3 per cent higher from a year ago, when measured in constant prices.

Agri steady, manufacturing rises

Services apart, the primary and secondary sectors also showed robust growth in April-June, with the agricultural sector expanding by 3.7 per cent, more than double the 1.5 per cent growth recorded in the same three months of last year. However, the GVA of ‘Mining & Quarrying’ expectedly contracted due to the unexpected heavy rainfall during the quarter that impeded mining activity.

The same rainfall also hit GVA growth of ‘Electricity, Gas, Water Supply & Other Utility Services’. Due to reduced demand for power because of the cooling effect of the rains, GVA growth of the aforementioned category rose by just 0.5 per cent. Construction activity was impacted too, with its growth slipping to a nine-quarter low of 7.6 per cent.

Manufacturing, however, offered support, as the sector expanded 7.7 per cent in April-June, up from 4.8 per cent in January-March and slightly higher than the 7.6 per cent posted a year ago.

Madan Sabnavis, Chief Economist at Bank of Baroda, cautioned that the high real GDP growth rate in April-June was aided by low price deflators – due to low inflation. Without adjusting for inflation, nominal GDP growth in the quarter was 8.8 per cent, the lowest in three quarters.

Good headache for policymakers

The unexpected pick-up in growth will be welcomed by policymakers, who have been scrambling to offset the impact of the 50 per cent tariff imposed by the US on goods from India. In his Independence Day speech earlier this month, Prime Minister Narendra Modi announced a raft of reforms to boost growth, including the long-awaited rationalisation of the Goods and Services Tax (GST) regime that is widely expected to drive consumption higher. This follows a similar consumption push announced by Finance Minister Nirmala Sitharaman in the Union Budget for 2025-26, when income tax rates under the new direct tax regime were reduced.

The latest GDP data, though, showed reasonable growth in private consumption. While lower than the 8.3 per cent growth a year ago, private final consumption expenditure rose by 7 per cent in April-June, up from 6 per cent in January-March. Gross fixed capital formation – a proxy for investments – increased by 7.8 per cent, down from 9.4 per cent in the previous quarter, but higher than 6.7 per cent in April-June 2024. In line with the near-10 per cent growth in ‘Public Administration, Defence & Other Services’ – indicative of high growth in overall government expenditure – government final consumption expenditure rebounded in April-June, posting an increase of 7.4 per cent compared to a contraction of 1.8 per cent in January-March and 0.3 per cent a year ago.

According to Sujan Hajra, Chief Economist at Anand Rathi Financial Services, while risks to the economy from US tariffs remain, “reforms gaining traction and inflation staying modest” meant “India continues to stand out as the most compelling macro story in a gloomy world”.

“Growth for the full year is still likely to average around 6.5 per cent, even after factoring in tariff headwinds, while nominal GDP growth in the high single digits supports corporate earnings expansion of 11–13 per cent,” Hajra added.