India’s economy grows 7.8 per cent in second quarter, beats forecasts

India’s economy unexpectedly gathered strength in the April-June quarter, defying expectations of slower growth as steep US tariff hikes threaten to weigh on business activity in coming quarters.

The United States on Wednesday doubled its tariffs on Indian goods to as high as 50%, the most punishing rate among US trading partners alongside Brazil, in a move economists say could hurt exports including textiles, leather goods and chemicals.

Asia’s third-largest economy saw gross domestic product expand 7.8% in the latest quarter from 7.4% in the previous three-month period, government data showed on Friday, handily above the 6.7% expansion economists had forecast in a Reuters poll.

The gross value added (GVA), seen as a more accurate measure of underlying economic activity, grew 7.6% in the three months to June, compared with 6.8% in the previous quarter. GVA excludes indirect taxes and government subsidy payouts, which tend to be volatile.

At this pace, India remains one of the fastest-growing major economies, despite an increasingly cloudy export outlook.

Prime Minister Narendra Modi’s administration has pledged support for sectors hit by US tariffs and has said it would propose tax cuts to spur domestic demand.

Indian government sources have also said New Delhi hoped the US would review the extra 25% tariff imposed this week due to India’s continued purchases of Russian oil. But as yet there are no indications of renewed talks between the two sides.

Manufacturing output rose 7.7% year-on-year in April-June, the first quarter of India’s fiscal year, against 4.8% in the previous quarter, while construction expanded 7.6%, easing from 10.8%. The agriculture sector expanded 3.7%.

The economy remains resilient, helped by firm rural demand, but trade tensions with the US could pose a downside risk, the Reserve Bank of India said in its monthly bulletin on Thursday.

The central bank expects the economy to grow 6.5% for the fiscal year ending in March 2026, and held its key interest rate unchanged at 5.50% earlier this month.

Some economists said steep US tariffs and subdued retail inflation - which eased to an eight-year low of 1.55% in July - could create room for limited monetary easing if needed.

Economists polled by Reuters had forecast growth likely cooled to 6.7% in the quarter and said it would continue to slow as a sharp hike in US tariffs threatens Indian exporters and jobs.

Madhavi Arora, Lead Economist, Emkay Global, Mumbai said, “The super healthy GDP growth print in the first quarter has gotten a temporary boost from extremely soft deflator, front-loaded government spending (unlike last year), along with front-loaded exports to the US. Some of these factors will reverse as we move ahead.

“Besides, the effective macro hit from the 50% tariff imposition will start to feed through exports and have a domino effect on employment, wages and private consumption. This could further dampen private investment outlook and hinder growth,

“However, on the face of it, softer deflator effect and some consumption buffer from GST cuts could offset the hit in real GDP growth as we move to calendar year 2026.”

Meanwhile Russian oil exports to India are set to rise in September, dealers said, as New Delhi defies US punitive tariffs designed to force the country to stop the trade and push Moscow towards a peace deal with Ukraine.

India has become the biggest buyer of Russian oil supplies that were displaced by Western sanctions after Moscow invaded Ukraine in 2022. This has allowed Indian refiners to benefit from cheaper crude. But the purchases have drawn condemnation from the government of US President Donald Trump, which increased US tariffs on Indian imports to 50% on Wednesday. New Delhi says it is relying on talks to try to resolve Trump’s additional tariffs, but Prime Minister Narendra Modi has also embarked on a tour to develop diplomatic ties elsewhere, including meeting Russian President Vladimir Putin. US officials have accused India of profiteering from discounted Russian oil, while Indian officials have accused the West of double standards because the European Union and the US still buy Russian goods worth billions of dollars.

“The tariffs are part of a broader trade discussion between India and the US, and given India’s increasing domestic refinery runs amid discounted Russian barrels, we don’t see India scuppering its Russian imports in meaningful volumes,” BNP Paribas said in a note.

The Indian oil ministry did not respond to a request for comment on Thursday. Without India, Russia would struggle to maintain exports at existing levels, and that would cut the oil export revenues that finance the Kremlin’s budget and Russia’s continued war in Ukraine.

Reuters