India’s Q1 GDP to grow at 7%, manufacturing remains a key driver: Bank of Baroda Research

India’s economic growth is likely to accelerate to 7% in the first quarter of FY27, with a possible upside of 0.2 percentage point if manufacturing activity performs better than expected, according to a Bank of Baroda Research report.

The estimate is higher than the 6.8% GDP growth recorded in Q1FY26. The research note expects manufacturing, electricity and construction to be key contributors to growth, supported by government capital expenditure, healthy credit growth and improving deposits.

“GDP to clock 7% growth in Q1FY27 with risk titled to the upside of 0.2% on the back of manufacturing sector,” Jahnavi Prabhakar, economist at Bank of Baroda, said in the report.

Manufacturing remains key growth driver

Manufacturing growth is estimated at 7.8% in Q1FY27, lower than the 10.4% recorded in the year-ago quarter but still indicative of strong activity. The report attributed the resilience partly to industrial production data, with manufacturing IIP growth at 6.3% compared with 4.1% a year earlier.

Corporate earnings in metals, power and infrastructure also showed improvement in net sales and profits, supporting the manufacturing outlook. However, crude oil and consumer goods industries faced margin pressure due to higher input costs.

Electricity generation and construction are expected to perform better, with growth estimated at 7% and 6%, respectively, in Q1FY27. Electricity had contracted 2% in the year-ago period, while construction grew 5.3%.

The report said the 23.6% rise in government capital expenditure during Q1 should provide further support to construction and related sectors.

Services growth seen at 8%

The services sector is expected to grow 8% in Q1FY27, led by financial services and public administration.

Financial, real estate and professional services are projected to expand 9.2%, helped by strength in both credit and deposit growth. Meanwhile, trade, hotels and transport are expected to grow 7%, reflecting the impact of higher input costs and compressed margins.

Public administration and defence are also expected to register stronger growth, supported by a 19.5% increase in net revenue expenditure, excluding interest payments, compared with 6.9% in Q1FY26.

Agriculture remains a weak spot

Agriculture, forestry and fishing are expected to grow 3.5% in Q1FY27, down from 4.4% a year earlier. The slowdown has been attributed to extreme heatwave conditions, El Nino conditions, a delayed southwest monsoon and lower reservoir levels during the quarter.

However, Bank of Baroda expects agricultural activity to improve in the coming quarters following a stronger monsoon. Rainfall, which was 40% below the long-period average in June, moved to more than 1% above the long-period average in July, although the distribution remained uneven.

West Asia crisis remains a risk

The ongoing West Asia conflict remains a key risk to India's growth outlook, particularly through higher commodity prices. International crude oil and urea prices rose sharply in Q1FY27, increasing pressure on domestic input costs and government subsidies.

The report noted that commodity prices eased in July following some movement in US-Iran peace talks, with crude prices falling 2.3% month-on-month and urea prices declining 11.7%. However, crude has since crossed $90 a barrel, while supply-chain normalisation is expected to take time.

“Since there has been no decisive end to the war, crude prices have once again already breached the US$ 90/bbl mark and since supply chain normalisation will take some time, this situation warrants careful monitoring,” the report said.

For the full financial year, Bank of Baroda Research expects the Indian economy to expand 6.6%-6.8%, with growth becoming broader-based amid stable inflation and currency conditions.