Weak rains, services likely eased Q1 economic growth to 4-quarter low

To be sure, economic activity remained resilient in the face of disruptions caused by the ongoing West Asia crisis, high-frequency indicators showed.

The National Statistics Office (NSO) is scheduled to release the gross domestic product (GDP) estimates for Q1 on August 31.

A compilation of growth forecasts by agencies shows economists expect headline growth to have eased to around 7.2 per cent from the 7.8 per cent clocked in Q4FY26. Forecasts for June quarter GDP growth range between 6.9 per cent by India Ratings & Research (Ind-Ra) and 8 per cent by the State Bank of India (SBI).

Six of the 10 high-frequency indicators (HFIs) tracked during Q1 softened sequentially, signalling a broad-based moderation in economic activity. During the quarter, the index of industrial production (IIP), services Purchasing Managers’ Index (PMI), domestic aviation traffic and bank credit accelerated sequentially from Q4 of FY26. However, Manufacturing PMI, Goods and Services Tax (GST) e-way bills, urban and rural auto sales, fuel consumption, and demand for rural job guarantees decelerated.

Canara Bank Chief Economist Madhavankutty G said a blip in agriculture due to El Niño and manufacturing not growing above the trend rate could mean growth will be closer to 7 per cent. “Our base case is for agriculture to grow by 2.5-3 per cent; industry to post a growth rate of 6 per cent and services to grow by 7.5 per cent,” he added.

Heatwaves during the summer months of Q1 are likely to have affected summer crop output. However, comfortable reservoir levels, supported by healthy rainfall in the previous year, are expected to have cushioned the impact to some extent.

The SBI said it tracks over 50 leading indicators across consumption and demand, agriculture, industry, services and other sectors, with 86 per cent showing acceleration in Q1FY27, compared with 69 per cent in Q1FY26. “Consumption and demand remain resilient. High-frequency demand indicators continue to support growth outlook, while industrial activity remains broadly satisfactory barring a few pockets, while services provide further support. Other indicators also corroborate our 8 per cent growth estimate,” it added.

The Monthly Economic Review (MER) released by the finance ministry last month, said the Indian economy sustained growth momentum during Q1FY27. This came against the backdrop of heightened global uncertainty. “While steady domestic demand continues to support growth, some high-frequency indicators have seen a softening in momentum,” it added.

Rajani Sinha, chief economist, CareEdge Ratings, said in Q1FY27 there were concerns around availability of raw materials and high energy prices. “However, the economy has shown strong resilience despite these challenges. High-frequency macroeconomic indicators like IIP, credit growth, auto sales, and exports showed strong growth in Q1, better than market expectations. Corporate performance in Q1 has also been broadly healthy and reflects the strong momentum in the economy. While we expect some moderation in GDP growth in Q1, we still expect it to be strong at 7.3 per cent,” she added.

Aditi Nayar, chief economist at Icra, said HFIs across the industrial and services sectors have revealed a healthy picture of domestic volume growth in Q1, belying the concerns of a fallout of higher commodity prices in the quarter on account of the West Asia conflict. “However, oil refining companies experienced sizeable losses in Q1FY27, which would impact the GVA (gross value added) growth. On balance, Icra projects the real GDP expansion to have eased to 7 per cent in Q1FY27 from 7.8 per cent in Q4FY26, in line with the Monetary Policy Committee’s growth forecast for the quarter,” she added.

Both Nayar and Sinha pointed towards a slowdown in the services sector in Q1. As per the data released recently by the Ministry of Statistics and Programme Implementation, the annual growth in 18 of the 19 sub actors in the Index of Services Production eased in the first two months (April-May) of Q1FY27 compared to Q4FY26. HFIs suggest some deceleration in trade, hotels, transport, communication and broadcasting services (THTCS) and public administration, while financial, real estate and professional services (FREPS) continued to show broad-based improvement.