India’s 7.8% Q1 GDP Growth Backed by Higher Subsidies and Corporate Cost Absorption

The Indian economy grew 7.8% compared to a year ago in the April-to-June quarter, holding steady the rate seen during the previous quarter. This growth beat the 7% forecast made by the Reserve Bank of India as well as the market expectation of 7.5%.

Quarterly momentum stayed firm, with seasonally adjusted annualised growth at 8.0%. Nominal GDP growth picked up from 9.1% to 10.3% year-on-year. Gross Value-Added rose faster at 8.2%, helped by a 9.2% manufacturing recovery and 10.0% growth in services. However, the better-than-expected GDP growth rate was not because of consumer demand alone.

HSBC Global Investment Research said in a report dated 1 September 2026 that the economy had received considerable protection during the quarter. The government and private companies absorbed external energy shocks, limiting their effect on household balance sheets.

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The difference between GVA growth of 8.2% and GDP growth of 7.8% offered one indication of this support. In the national accounts, GVA moves ahead of GDP when indirect tax collections decline or subsidies increase. Both happened during the quarter.

GST rate cuts dating from September 2025, together with lower excise duty on oil, reduced net indirect taxes by 7.0% year-on-year. Meanwhile, the central government’s subsidy bill for food, fertiliser and fuel increased 37%.

Manufacturers provided another layer of support by absorbing higher raw-material and energy costs rather than passing them on to retail consumers. The decision protected consumers from the full increase in costs, but put pressure on corporate profit margins.

The manufacturing price deflator dipped to -1.4%, while the total GDP deflator stayed at 2.3%. Real private consumption grew 7.1% year-on-year, supported by urban demand for consumer durables.

Investment activity remained strong. Gross fixed capital formation grew 11.9% year-on-year. Central government capital expenditure rose 30% year-on-year on a year-to-date basis, while Public Sector Enterprises increased their capital spending by 28% year-to-date.

The public capital-expenditure push generated jobs for rural workers at a time of deficient rainfall and slow crop sowing.

Growth may moderate in the coming quarters as the effect of the GST cuts begins to fade. Public capital expenditure could also slow as the government works to keep the fiscal deficit within target. Industrial frontloading has, at the same time, pushed finished-goods inventory to a 10-year high.

Even with some moderation, output remains above the RBI’s baseline forecast. The central bank expects inflation to average more than 5.0% over the next three quarters. HSBC expects the RBI to deliver two repo-rate increases of 25 basis points each in FY27, taking the terminal repo rate to 5.75.