The GDP growth was expected to be hit by the impact of tariffs, albeit partially. The real impact of tariffs may manifest in the coming months only. However, the bounce in GDP growth was largely driven by a rebound in domestic output. Even as exports continued to be tepid, and the export-oriented segments came under pressure, the domestic oriented sectors continued to flatter on the upside. That was the broad theme that triggered the rebound in GDP growth in Q1FY26. But that was not all. There were a lot of very interesting sub-stories in the GDP tale. 

On the primary sector front, agriculture grew at 3.7%, which is almost twice the rate of growth in the corresponding first quarter of FY25. However, contraction in mining and quarrying offset that. In the secondary space, manufacturing grew at over 7%, while construction and power also grew at a healthy clip. However, if you compare on a YOY basis, the overall manufacturing and secondary sector performance was not at par with the last year. Despite that, it managed to sustain the overall GDP growth, and also gave a boost to the services sector indirectly. 

The real big story was not in the primary or the secondary sectors, but in tertiary sector, which largely comprises of the services sector. Today, services make up close to 65% of the overall GDP of the Indian economy, so its performance is very crucial. In Q1FY26, the services like defense, public utility services, and the financial services space grew by more than 9%. That was the real trigger for the growth in GDP. It was the real sharp rebound in the services sector that led to such a big jump in GDP growth. The big advantage is that most of the services are pure domestic plays; and hence, they were hardly impacted by the tariffs. In fact, they were largely immune to it. 

While the rebound in the GDP in the first quarter is commendable, there are some warning signals. For instance, the real impact of the 25% and 50% tariffs will only start showing in the second and the third quarters. That is when the real GDP impact will also be felt. That is something that policymakers must be watchful about. Also, the negative terms of trade have resulted in a sharp depreciation in the Indian rupee, which automatically depletes the nominal and real GDP in dollar terms. Thirdly, nearly $50 billion of exports to the US will be affected, and that is going to have a direct impact on output, jobs, purchasing power, and the bank NPAs. That is the real challenge!