Q1FY27 REAL GDP GROWTH AT 7.8%; DESPITE HIGHER INFLATION

Q1FY27 REAL GDP GROWTH AT 7.8%; DESPITE HIGHER INFLATION

The GDP data published by MOSPI for the first quarter ended June 2026 (Q1FY27) is interesting for couple of reasons. Firstly, the absolute numbers are sequentially lower. That is partially due to the first quarter effect and partly due to the impact of the ongoing war in the Middle East. Secondly, the inflation impact has been higher with the GDP deflator at 2.5%. Despite that, the real GDP growth has been robust at 7.8% in Q1FY27.

Growth in real agricultural GDP has been hit hard by rural inflation. However, on a real growth basis, secondary and tertiary sector have done much better than the first quarter of FY26. The impact of the war is also visible from the fact that the sequential GDP (compared to Q4FY26) is sharply lower. While that is partly the case each year; this year it has got accentuated by the economic impact of supply chain constraints caused by the war.

NOMINAL GROWTH PICKS UP MOMENTUM IN Q1FY27

It is the nominal growth (pre-inflation) that has shown better traction compared to the last two sequential quarters; as it gets back into double digits.

What is so critical about the nominal growth table? Here are the 3 things that stand out.

Firstly, why does nominal growth matter. Most of the key macro comparisons like global growth comparisons, level of economic activity, and job creation are determined by the level of nominal GDP. Also, for the fiscal deficit to appear more subdued, a higher level of nominal GDP is essential. For Q1FY27, the nominal GDP growth is back to double-digit growth. India needs to sustain double-digit nominal growth on long-term basis.

In terms of nominal growth, mining and quarrying showed a smart turnaround in Q1FY27; bouncing from -3.4% to 22.3%, largely led by coal and other minerals. A major contribution also came from growth in mining of rare earth minerals in India.

The good news is that agricultural growth at a nominal level has improved from 4.7% to 7.5% yoy. This is despite the monsoons facing a near 13% shortfall as of the end of August. Stable acreage has helped, although a lot will depend on the Rabi output.

The secondary sector saw growth improve by about 390 bps to 11.0% in Q1FY27 on a yoy basis. While manufacturing remained robust, the real big boost came from a surge in construction activity. There was a surge in utility services.

Of course, the alpha came from services; with sturdy growth from trade, hotels, transport, finance and realty. Even government spending on defence got a boost in the quarter.

REAL GDP GROWTH – ROBUST DESPITE HIGH INFLATION

Here is a quick look at the real GDP numbers and the break-up by quarter, which is the real GDP net of inflation.

The components above are of GVA (which is GDP without the impact of indirect taxes and subsidies). This real GDP growth shows the inflation impact in Q1FY27.

The real GDP growth of 7.8% in Q14FY27 is 90 bps better on a yoy basis. But the more important point here is that the growth has come despite a higher impact of the GDP deflator due to higher implicit inflation. This is in contrast to the last few quarters, wherein the real GDP got a boost from lower inflation impact.

Within the secondary sector, the manufacturing activity showed the best traction at 9.2% on real basis (GVA). Construction was much higher on a nominal basis, but then the inflation impact on construction has also been relatively higher.

The agricultural growth at 2.9% has been sharply lower than the average in the last few years. That can be attributed to a combination of weak monsoons this year as well as higher rural inflation. A sharp spike in the price of urea in the last quarter was a key factor impacting rural costs, impacting agricultural real output.

On the services side, the growth was robust across at 10.0% in real terms, largely led by real growth in finance and real estate. With services accounting for over 60% of the GDP basket, robust growth in services has provided the alpha to real GDP growth.

Farm sector has bene tad disappointing in Q1FY27, but that was more than made up by robust growth in manufacturing and services.

FINAL WORD FROM EXPENDITURE COMPONENTS

One of the interesting ways to look at GDP is from the expenditure perspective. In real GDP terms, private final consumption as a driver of GDP growth accelerated from 6.8% to 7.1% yoy, while the gross fixed capital formation accelerated from 5.8% to 11.9% on yoy basis. It is a good signal that GCFC is making a much bigger contribution this year.

How does it look in nominal terms? In nominal GDP terms, private final consumption as a driver of GDP growth accelerated from 8.3% to 9.9% yoy, while the gross fixed capital formation accelerated from 5.4% to 20.4% on yoy basis. Overall, while the role of government spending is being underplayed; both private final consumption and gross capital formation are playing a bigger role in driving GDP. That is the good news!