Manufacturing a bright spot; services presents a mixed bag: Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

India's economy has demonstrated remarkable resilience in 2026, withstanding various external challenges such as geopolitical tensions, supply chain disruptions, higher energy prices, weather-related uncertainties and rising input costs. Despite controversies surrounding the revised GDP figures, the real GDP growth remained impressive at 7.8% in the first quarter, demonstrating the economy's capacity to absorb external shocks.

To mitigate the impact of the energy shock triggered by the West Asia conflict, the government implemented measures like excise duty reductions and increased LPG and fertiliser subsidies, thus limiting the transmission of higher energy costs to households and keeping domestic demand relatively stable. While corporate India continued to post healthy revenue growth, rising raw material and input costs have put pressure on profit margins, curbing earnings growth despite strong topline performance.

The economy's oil intensity, measured by oil consumption in grams per unit of real GDP, has been declining - from 1.34 in the early 2000s to 0.74 in FY26 - further enhancing its ability to withstand energy price shocks.

Investment activity and exports have been the main growth drivers, although sectoral momentum has been uneven. The manufacturing sector has been a shining spot, driven by robust industrial credit growth, increased electricity demand, and sustained expansion in capital goods production, indicating robust investment momentum. The strong home loan growth, coupled with robust steel and cement consumption, underscores ongoing infrastructure focus and real estate activity.

However, a softening in fuel consumption and railway freight traffic suggests that some industrial demand areas have weakened. The services sector, another vital growth pillar, is showing a more mixed performance. While credit growth in the sector remains strong, business sentiment indicators have softened recently. Travel-related activity has also experienced some setbacks, partly due to higher airfares driven by increased aviation fuel costs.

On the bright side, domestic consumption remains a crucial growth anchor, with private consumption remaining strong in Q1, evidenced by healthy sales growth in passenger vehicles, two-wheelers, and tractors. Additionally, labour market conditions have improved, particularly in rural areas, further bolstering household spending. Looking forward, strong domestic demand, healthy credit growth, rising investment activity, and a resilient corporate sector are expected to continue supporting growth in the near term.

However, risks to the outlook have increased. Geopolitical uncertainties, which have persisted, continue to keep energy and commodity prices vulnerable to renewed volatility. As fiscal space to absorb additional shocks becomes tighter, both global and domestic financial conditions are beginning to tighten as monetary policy enters a tightening phase.

The fading benefits of earlier GST-related tax reductions, the gradual passthrough of higher input costs, and less favourable base effects are also likely to dampen growth momentum in the coming quarters.