The recent surge in both the manufacturing and service sectors has resulted in an impressive growth rate of 7.8% during the first quarter of the current financial year, marking the highest increase in five quarters. This positive development comes as a surprise to many economists, who had anticipated a potential slowdown in economic activity during this period. The Reserve Bank of India had also projected a more conservative growth estimate of only 6.5%.
In particular, the service sector exhibited remarkable performance in the June quarter, achieving a robust growth rate of 9.3%, the highest recorded in the last 8 quarters. This surge was largely driven by a significant 9.8% increase in public administration, defence, and other services, as well as a compact 9.5% growth in financial, real estate, and professional services. Conversely, the manufacturing sector, while experiencing growth, saw a more modest increase of 7.7%, which is the highest in the last four quarters. Alarmingly, the construction sector, known for its labour intensity, registered its lowest growth in nine quarters at just 7.6%. Moreover, agricultural output saw an encouraging growth rate of 3.7% this quarter, more than double the rate observed during the same period of the previous financial year.
Nominal GDP experienced a notable increase of 8.8% in the June quarter; however, the Finance Ministry had forecasted a higher growth target of 10.1% for the current financial year. It is crucial to recognise that the slower pace of nominal GDP growth poses challenges for the government in meeting its fiscal deficit and debt-to-GDP ratio targets. Nevertheless, there are optimistic expectations for growth in the upcoming quarter.
It is important to note that a slowdown in loan disbursal during this period has hindered even higher potential growth rates in the service and manufacturing sectors. According to data from the Reserve Bank of India dated June 27, 2025, the year-on-year growth rate of bank loans increased by 9.5%, reaching a total of ₹ 184.83 lakh crore. However, this growth is not considered sufficient for robust economic development. Notably, this increase follows a three-year low in loan growth rates recorded in May, when the total stood at ₹168.86 lakh crore as of June 28, 2024. Meanwhile, deposits saw a more favourable growth rate of 10.06%, exceeding loan growth by over 50 basis points on an annual basis. As of June 27, 2025, total deposits stood at ₹234.26 lakh crore, up from ₹212.85 lakh crore in the same period a year prior.
In other economic indicators, private expenditure accelerated by 7% in the first quarter of the current financial year compared to the previous quarter, suggesting an improvement in consumer demand. Government expenditure also grew at 7.4%. Investment, driven predominantly by public capital expenditure, grew at a rate of 7.8%. It is essential to mention that private final consumption expenditure had reached its lowest point in five quarters during the last quarter of the previous financial year.
Several factors, including income tax relief, a 100-basis-point reduction in the repo rate, favourable conditions for Kharif sowing, and improvements in the goods and services tax, have stimulated private consumption. In terms of consumer goods, the sale of fast-moving consumer goods (FMCG) rose to 6% in the first quarter, compared to 5% in the previous quarter. Interestingly, over the last six quarters, FMCG sales in rural areas have consistently outpaced those in urban areas, indicating a shift in spending patterns fuelled by increased economic activity in rural regions.
Furthermore, data released by the National Statistical Office (NSO) reveal that the share of private final consumption expenditure in nominal GDP jumped to 60.3% in the first quarter of the current financial year, up from 58.3% in the previous quarter. On the other hand, gross fixed capital formation (GFCF) as a percentage of nominal GDP declined slightly from 31% in the prior quarter to 30.4% in the current quarter.
The latest data reveals that GFCF experienced robust growth of 7.8% in the first quarter of the current financial year. While this figure reflects positive momentum, it represents a decline compared to the more impressive 9.4% growth registered in the fourth quarter of the preceding financial year. GFCF is often interpreted as a crucial indicator of investment demand within the economy.
In a noteworthy development, capital expenditure at both the central level and among the 25 state governments surged by an impressive 33.3% during the first quarter. This substantial increase is indicative of a heightened focus on infrastructure and developmental projects. Furthermore, the production of capital goods also demonstrated considerable strength, recording a growth rate of 9.8% in the same period.
Government expenditure, as represented by Government Final Consumption Expenditure (GFCE), painted a similarly positive picture, exhibiting a strong growth of 7.4% in the first quarter. This marks a significant turnaround from the previous quarter, during which GFCE had contracted. Analysts anticipate further improvements in government spending as economic activities are expected to gain momentum in the upcoming quarters.
Turning to revenue, the gross revenue collected by the Central Government from Goods and Services Tax (GST) reached an impressive ₹1.96 lakh crore in July 2025. This figure not only reflects a 7.5% increase compared to the same month last year but also represents a 6% rise over the collections in June 2025. This steady growth in GST revenue underscores the country’s resilience in economic activities. Moreover, there are expectations of an uptick in consumption demand following the implementation of new GST rates, which could further stimulate economic growth.
However, the latest tariffs imposed by the United States, coupled with the prevailing uncertainties in the global economy, are projected to exert a partial impact on domestic private investment in the current financial year. This impact is likely to be particularly pronounced in the Micro, Small and Medium Enterprises (MSME) sector, which is a vital component of the economy, accounting for approximately 45% of the nation’s total exports. In an effort to mitigate the negative effects of these US tariffs, Prime Minister Narendra Modi recently undertook a visit to Japan, where a target was set for an investment of 10 trillion yen (approximately $ 67 billion) in India over the next decade. Furthermore, India is actively pursuing business agreements with various countries, though these endeavours may take time to come to fruition.
The analysis suggests that while US tariffs will exert some pressure on the Indian economy, the overall outlook remains optimistic. Investment, consumer demand, and government expenditure are on an upward trajectory, signalling positive economic health. The agriculture sector has demonstrated remarkable performance during the first quarter of the current financial year, buoyed by favourable monsoon conditions and improved Kharif sowing outcomes. Continuous efforts to expedite loan disbursement further enhance the farming sector’s prospects. Inflation remains under control, paving the way for sustained growth in both the service and manufacturing sectors. As a result, projections indicate that the growth rate for the current financial year may range between 6.5% & 7.0%, suggesting a resilient economy poised for continued expansion.
Satish Singh is a senior columnist based in Mumbai, and the opinions expressed in article are personal.
