India's 7.8% GDP Growth: A Dream Start or a False Hope?

India's economy has just delivered a pleasant surprise, leaving investors optimistic about the future. The first quarter GDP growth for FY26 came in at a robust 7.8%, far surpassing the Reserve Bank of India’s projection of 6.5%, economists’ estimates of 6.8% and the government’s forecast range of 6.3–6.8%.

On the surface, it looks like India’s economy is running on all cylinders. But looking beyond the headline figures is essential to understanding the full picture.

A Strong Start to FY26

India’s GDP growth of 7.8% in the first quarter of FY26 is the fastest quarterly expansion in five quarters, signalling the economy’s resilience despite global challenges. This marks a notable victory at a time when the tariff tensions with the US are looming over the global economic outlook.

Manufacturing Stepping Up

For years, India’s manufacturing sector has been a laggard, but it is finally showing signs of a sharp rebound. The manufacturing sector’s performance in August has been one of the key drivers of this growth.

India’s HSBC Manufacturing PMI reached its highest level in over 17 years, at 59.3, up from 59.1 in July. This is a clear sign of the strength in factory orders and output. A PMI reading above 50 indicates growth and a reading this high speaks volumes about the sector’s recovery.

Services & Agriculture: Holding the Fort

Not to be left behind, the services sector posted an impressive 9.3% growth, marking its strongest performance in nearly two years. Agriculture, too, made a respectable contribution with a growth of 3.7%.

Employment Trends: A Mixed Bag

India’s labor market has been robust, with employment rising for the 18th consecutive month in August. However, the pace of job creation slowed to its lowest rate since November 2024. Despite this slowdown, hiring levels remain strong relative to long-term trends, signalling that while growth may be easing, India’s labor market is still expanding.

Private Consumption: A Positive Trend

Private final consumption expenditure (PFCE), a key indicator of economic health, showed a healthy pick-up. Several factors are at play here, including rationalized income tax slabs, easing food prices and the impact of recent monetary easing by the Reserve Bank of India. These factors combined have helped bolster consumer confidence and spending, contributing positively to India’s growth.

Challenges Ahead: The Tariff Storm

Despite the positive GDP numbers, India faces significant challenges in the coming months. Exports have been front-loaded in anticipation of the US imposing tariffs, a major risk given that nearly 20% of India’s merchandise exports are directed toward the US. These tariffs could dampen the momentum and drag down GDP growth in the latter half of FY26.

In addition to tariff tensions, there are concerns about global trade dynamics, including potential cuts to Goods and Services Tax (GST), a global slowdown and high equity valuations relative to modest earnings growth projections. While India’s economic data has been strong, global factors, particularly the impact of US tariffs, are likely to dampen growth in the second half of FY26.

The SCO Summit & India’s Trade Outlook

The 2025 Shanghai Cooperation Organisation (SCO) summit, taking place against the backdrop of unpredictable US tariff policies, could play a significant role in shaping India's geopolitical future. Chinese President Xi Jinping’s push for a multipolar world and equitable global economic integration is a vision India may want to align with, particularly given its strained relationship with the US.

However, the economic impact of the SCO summit for India remains uncertain. India faces a steep 50% tariff on its exports to the US, potentially leading to losses of around $20 billion—roughly half a percent of India’s GDP. While the summit’s discussions between Russia, India and China (RIC) may create a sense of diplomatic alignment, the economic benefits for India may be limited in the short term. With China being a key competitor in many goods subject to US tariffs, India is unlikely to benefit significantly from deeper trade relations with China in the near future.

Moreover, Russia’s economic influence does not match that of the US and the primary sources of foreign portfolio investment (FPI) into India still come from the US and Europe. As such, while the SCO summit could serve as a valuable platform for dialogue, its immediate economic benefits for India may be limited.

What’s Next for Indian Investors?

For long-term investors, India’s fundamentals remain strong, but the short-term outlook may be rocky due to external factors. The next few quarters will be crucial in determining whether India can maintain this growth pace or if external factors will derail the recovery.

With all these variables in play, the best course of action for investors is to stay informed and flexible. While some sectors will undoubtedly benefit from India’s growth story, others could face challenges. The best approach would be to adopt an opportunistic stance. Consider accumulating stocks in tranches as the market corrects by 5% or more.

The Power of Diversification

With the current market volatility, diversification is more important than ever. Depending on your risk appetite, it might be a good idea to focus on sectors that are less sensitive to external shocks. Domestic-focused sectors—like consumer goods, banking and NBFCs—could offer better resilience compared to export-heavy industries that might take a bigger hit from these tariffs.

The key is to stay informed, monitor global trade developments and make strategic, data-driven decisions. If you’re unsure about how to approach this, consider leveraging Liquide Wealth Baskets, which are regularly rebalanced to keep your portfolio aligned with market conditions.

Markets move on anticipation, not confirmation. Waiting for perfect clarity often means missing the opportunity. Therefore, instead of trying to time the market, consider exploring Systematic Investment Plans (SIPs) to invest in these diversified baskets, which will help you spread your risk wisely.

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