India GDP Preview: Q1FY26 Growth - Services Surge, Industry Slows: India’s Uneven Q1 Recovery

India’s economy is expected to have expanded by 6.6% yr/yrr in Q1 FY26 (April–June 2025), marking a deceleration from the 7.4% growth recorded in the previous quarter. While this still places India among the fastest-growing major economies, the underlying dynamics suggest a more uneven growth: government capital expenditure continues to shoulder much of the burden, while private investment and industrial activity remain subdued.

Drivers of Growth

The key propellant of Q1 growth is expected to be public capital expenditure, which surged 52% yr/yr to INR 2.8 trillion (USD 32bn). Infrastructure build-out, along with targeted fiscal measures such as proposed cuts in levies on small cars and consumer goods, provided a cushion for domestic demand. Services, particularly contact-intensive segments such as trade, transport, and finance, likely outperformed. 

On the supply side, agriculture benefited from strong rabi output and early kharif sowing, helping stabilise rural consumption. Disinflation in food prices further eased household budgets. Yet the gains here are fragile, tied closely to monsoon patterns and the ability of farm output to hold up in the second half of the year.

Weak Spots

The growth story is tempered by muted private investment. Corporate capex remains cautious in the face of global uncertainty and tariff disruptions, with weak credit transmission limiting the impact of the RBI’s cumulative 75bps rate cuts earlier in the year. Industrial activity, particularly manufacturing, showed clear signs of fatigue. Industrial output slowed to its lowest pace in eight months, and core goods demand has yet to regain momentum.

While government spending and infrastructure-linked demand buoyed cement and steel consumption, the broader industrial economy expanded at an estimated 4.0% in Q1, down from 6.5% in the March quarter. Similarly, urban consumption remains underwhelming, weighed down by stagnant real wages and sporadic job losses.

Outlook

Looking ahead, growth momentum is expected to ease further: forecasts point to 6.5% in Q2, 6.5% in Q3, and 6.3% in Q4, bringing the full-year FY26 expansion to around 6.5%.  The one-off boosts that lifted GDP above GVA in late FY25, such as indirect tax adjustments and subsidy rationalisations, have largely dissipated. Gross Value Added (GVA), a more stable measure, is projected at 6.4% in Q1.

For policymakers, the Q1 data illustrate a familiar tension: government spending is providing a strong short-term lift, but sustained growth requires a revival in private investment and stronger industrial momentum. Without this pivot, headline growth of 6.3–6.6% may prove insufficient to generate meaningful job creation or cushion India against external shocks from tariffs and global slowdown risks. India’s economy continues to deliver respectable growth in Q1 FY26, but the reliance on public spending over private dynamism underlines the fragility of the recovery. For the trajectory to remain credible, the next phase of the cycle must see private capital formation step up.