India’s 7.8% Q1 growth signals resilient economy, but rising price pressures cloud outlook: SBI Ecowrap

India’s economy grew 7.8% in the first quarter (Q1) of FY27, higher than the 6.9% growth recorded in the year-ago quarter, with broad-based strength across most sectors, according to SBI Research’s latest Ecowrap report. 

The growth was close to SBI Research’s earlier estimate of 8%. On an unchanged base, Q1FY27 real GDP growth would have been 8%, exactly in line with its projection. The stronger-than-expected performance was supported by robust supply-side activity. Gross value added (GVA) grew 8.2% in Q1FY27, compared with 7% a year earlier while core GVA, excluding agriculture and public administration, grew 9.5%, up from 8.1%. 

SBI Research has now raised its FY27 GDP growth forecast to 7.3% from 6.6%. It expects growth of 7.3% in Q2, 7.2% in Q3, and 6.9% in Q4, with domestic demand likely to remain the key growth driver. 

Services lead, manufacturing remains strong 

Services remained the strongest-performing segment, growing 10% in Q1. Financial, real estate, and professional services expanded 12.1% while trade, hotels, transport, and communication services grew 8.5%. 

Industry growth stood at 7.7%, despite a 2.4% contraction in mining and quarrying. Manufacturing grew 9.2%, against 8.3% a year earlier. Agriculture growth was comparatively modest at 3.6%. 

On the demand side, private consumption grew 7.1% while capital formation increased 11.9%, nearly doubling from the year-ago period. Exports rose 12% while imports contracted 1.1% in real terms. 

GDP revisions alter FY26 growth picture 

The latest National Accounts Statistics release has revised earlier GDP estimates, with changes incorporating a Producer Price Index, a new industrial production series and a Banking Services Price Index. 

The revisions have been mixed. Real and nominal growth estimates for Q2 and Q3 of FY26 have been lowered while real GDP growth for Q4 has been revised upwards by 72 basis points. The revised annual GDP growth for FY25 now stands at 7.2%. 

Inflation pressures warrant attention 

SBI Research said output price pressures strengthened in Q1FY27, with the GDP deflator rising to 2.3% from 1.1% a year earlier. The GVA deflator at basic prices also rose sharply to 3% from 1.1%. 

The manufacturing deflator, however, turned negative at -1.4%, suggesting that input prices may be rising faster than manufacturers’ output prices. Higher crude oil prices could further increase input costs while limited pass-through to consumers could compress manufacturers’ value addition. 

Credit growth strengthens 

Bank credit growth has also accelerated. Credit extended by scheduled commercial banks grew 18.3% year-on-year in the fortnight ended August 15, compared with 10.2% a year earlier, while deposits grew 14.7%, against 10%. 

SBI Research expects aggregate deposit growth of 14.5-15% and credit growth of 15-16% in FY27. The report said the combination of strong growth, rising credit demand and emerging price pressures could eventually warrant a reassessment of monetary policy. It argued that a shallow, front-loaded rate hike could become relevant if output price pressures broaden, while also providing greater clarity to markets on the Reserve Bank of India’s policy stance. 

The FY27 Budget has pegged the fiscal deficit at ₹16.96 lakh crore, or 4.5% of GDP while Centre’s debt is budgeted at 57.4% of GDP. Assuming nominal GDP growth of 10%, SBI Research estimates the fiscal deficit could be around 4.6% and the debt-to-GDP ratio around 57.1%.