India posts 7.8pc economic growth in Q1 as domestic demand offsets Iran war impact

India's economy expanded by a stronger-than-anticipated 7.8 percent in the April-June quarter, official figures revealed on Monday, despite the fallout from the Iran war. The statistics ministry's data showed that the nation's Gross Domestic Product (GDP) grew at a faster pace than initially expected, primarily due to a robust services sector.

While this figure marked a decline from a revised 8.6 percent growth in the previous quarter, it still surpassed market projections of 7.3 percent. The statistics ministry stated that India's economy has maintained its growth momentum despite global challenges, a fact that will be positive for Prime Minister Narendra Modi's government, which has been dealing with political setbacks and intricate policy hurdles.

The year began on a positive note for India, with robust economic growth and progress on a long-pending interim trade deal with the United States. However, this momentum was hampered by the stalemate in negotiations with Washington. The Iran war has also led to an increase in energy costs and India's import bill, exacerbating inflation.

New Delhi's heavy reliance on imports for oil and gas makes it particularly susceptible to the global energy shock resulting from the conflict. The central bank initially projected a slowdown in growth for the current fiscal year in response to the Middle East turmoil, but these projections were later revised upwards. The Indian government has thus far managed to shield citizens from the brunt of the war's economic impact by implementing limited and phased fuel price hikes.

However, analysts caution that this approach might not suffice as tensions in the Middle East continue and global crude prices remain high. Tax cuts across consumption and income last year have also contributed to a boost in domestic demand and helped safeguard India's economy against geopolitical tensions, including former US President Donald Trump's tariff war.