Capex, services lead expansion as India’s Q1FY27 GDP growth beats estimates at 7.8%: SBICAPS

India’s real GDP growth came in stronger than expected at 7.8% year-on-year (YoY) in the first quarter of FY27, beating the market forecast of 7.1%, despite an upward revision to the year-ago base, according to a report by SBICAPS.

The Q1FY26 GDP growth rate was revised upwards by 10 basis points, making the latest growth performance even more notable. Nominal GDP grew 10.3% during the quarter, implying a GDP deflator of around 2.5 percentage points. While the deflator improved from the previous quarter, it remained below expectations.

SBICAPS attributed the lower-than-expected nominal GVA growth partly to methodological changes in deflator computation, particularly the replacement of the Wholesale Price Index (WPI) with the Producer Price Index (PPI). The impact was particularly visible in manufacturing, where real GVA growth outpaced nominal GVA growth by 1.5 percentage points, suggesting pressure on margins.

The gap between real GDP and real GVA widened to 40 basis points in Q1FY27, even as major subsidies increased 35% YoY, while indirect tax collections moderated during the first four months of FY27.

Services, manufacturing drive growth

The services sector continued to lead economic growth, expanding 10% YoY in Q1FY27. Financial, real estate, ownership of dwelling, information technology and professional services delivered another strong performance, extending their robust run into a fourth consecutive quarter.

Public administration, defence, and other services also recovered during the quarter, registering their strongest annual growth in two years.

Manufacturing recorded real growth of 9.2% YoY. SBICAPS said strong output growth, corroborated by the Index of Industrial Production (IIP), helped the sector overcome significant input price pressures during the quarter.

The primary sector, however, remained a laggard for another quarter. Agriculture and allied activities will remain an area to watch for the rest of FY27, particularly given below-par rainfall during the period.

Capex emerges as key growth driver

Capital expenditure emerged as a major driver of growth in Q1FY27, with indications that the momentum may extend beyond government spending.

Union government capex stood at ₹4.5 trillion during the first four months of FY27, registering 30% YoY growth. In line with the increased investment activity, real gross fixed capital formation (GFCF) grew 11.9% YoY in Q1FY27, the highest growth recorded on the new GDP series.

SBICAPS said several indicators suggest that the latest investment pickup could also involve the private sector. Non-food bank credit and outstanding credit to the commercial sector have accelerated, while industrial output indicates that capacity utilisation is stretching.

Private consumption remained relatively resilient, although it moderated from Q4FY26. The report said the boost from GST rate rationalisation could gradually lose momentum, with base effects from October 2026, elevated prices and weaker rural sentiment likely to weigh on consumption during the second half of FY27.

Exports, meanwhile, remained strong despite the quarter being affected by the West Asia crisis, while imports moderated.

GDP revisions point to methodological impact

The Ministry of Statistics and Programme Implementation also released revised GDP estimates for the previous three financial years.

Real GDP growth for FY26 was revised upwards by 10 basis points to 7.3%, with smaller revisions also made for FY24 and FY25. However, nominal GDP estimates were revised lower. In absolute terms, nominal GDP for FY26 has been revised to ₹345.4 trillion from the earlier estimate of ₹346.4 trillion, according to the report.

Growth outlook improves, but rate hike risks rise

SBICAPS expects India to remain the fastest-growing major economy in FY27 and believes full-year real GDP growth could be stronger than previously projected. However, the report flagged emerging risks on the inflation and monetary policy fronts. Inflation readings are moving higher, while the Reserve Bank of India’s projections indicate that both headline and core consumer price inflation could remain above target.

With real interest rates close to zero, the minutes of the latest Monetary Policy Committee meeting also showed that members were considering scenarios involving rate hikes. The prospect of higher rates in the US and elevated oil prices could further strengthen the case for monetary tightening in India, SBICAPS added.