India’s economy is showing remarkable resilience, with a new report from the State Bank of India (SBI) suggesting a strong start to the financial year. The bank’s research arm projects that India’s gross domestic product (GDP) grew by 6.8-7.0% in the first quarter of fiscal year 2025-26, significantly surpassing the Reserve Bank of India’s (RBI) forecast of 6.5%.
The positive outlook is largely attributed to robust domestic demand and higher government capital expenditure. This strong performance positions India as the fastest-growing major economy, despite persistent global economic headwinds. The official GDP figures for the quarter, covering April to June, are expected on August 29.
Key Drivers of Growth
The SBI report points to several factors underpinning this faster-than-anticipated growth. A key driver is the continued momentum in the services sector, which has been a pillar of the Indian economy. While industrial and agricultural growth have shown some moderation, a buoyant services sector has more than compensated, according to other analysts like ICRA.
Another critical component is the government’s sustained focus on capital expenditure, which has surged by over 50% year-on-year. This public spending, particularly on infrastructure projects, is believed to be having a strong multiplier effect, stimulating economic activity across various sectors.
However, the report also raises a note of caution: the pace of private capital expenditure remains “muted.” While public investment is currently driving growth, sustainable long-term expansion will require the private sector to step up its investment efforts. The report underscores the need for private companies to complement government spending to maintain a high-growth trajectory.
The Inflation Picture
The SBI analysis also touched upon the inflation landscape, noting a significant narrowing of the gap between real and nominal GDP growth. This is largely a result of historically low inflation levels. The RBI’s recent decision to lower its inflation forecast for the current fiscal year to 3.1% (from an earlier 3.7%) further supports this trend.
This benign inflation environment has fuelled expectations of potential interest rate cuts from the RBI in the coming months. The SBI report anticipates that future monetary policy decisions will be data-driven, with a possible rate cut of 25 basis points on the horizon.
A Cautious Full-Year Outlook
Despite the impressive Q1 performance, the SBI report offers a more conservative forecast for the full financial year. It projects a 6.3% GDP growth for fiscal year 2025-26, which is slightly below the RBI’s annual target of 6.5%. This is based on the expectation that growth may taper off in the subsequent quarters due to continuing global trade uncertainties and a lack of momentum in private investment. The report notes that new US tariffs on Indian exports could negatively impact corporate earnings in the coming quarters.
Overall, the report provides a compelling narrative of an Indian economy that is not only robust but also capable of defying initial expectations. While the challenges of private investment and global trade remain, the strong Q1 showing provides a solid foundation and bolsters confidence in India’s economic resilience.