India's economy is expected to maintain its high growth momentum in the coming quarters, although headwinds from increased US tariffs could create a downward bias. This optimistic outlook follows a stronger-than-expected 7.8% GDP growth in the first quarter of fiscal year 2025-26, the highest in five quarters.

Several factors are contributing to this positive trajectory. Strong domestic demand, fueled by easing inflation, higher employment, and positive consumer sentiment, is expected to drive GDP growth in the months ahead. Private Final Consumption Expenditure (PFCE) grew by 7.0% in Q1 FY26, with its share in GDP rising to 60.3%, the highest level in 15 years for the first quarter. Government capital expenditure has also been a major factor in sustaining growth. The Centre's capital expenditure rose by 52% year-on-year in the first quarter, acting as a key growth driver. Gross Fixed Capital Formation (GFCF) recorded 7.8% growth.

The manufacturing and services sectors are also demonstrating strong momentum. The manufacturing sector grew by 7.7%, while the services sector saw a two-year high growth of 9.3%. The construction sector also experienced good growth at 7.6% during the first quarter. Nominal GDP growth in Q1 FY26 came in at 8.8%, exceeding private sector economists' expectations.

Various organizations have also revised their growth forecasts for India. The International Monetary Fund (IMF) raised its forecast for India's economic growth to 6.4% for both 2025 and 2026. The United Nations (UN) has forecasted growth of 6.3% in 2025 and 6.4% in 2026, while The Confederation of Indian Industry (CII) places its estimate slightly higher at 6.40 to 6.70%. Deloitte expects India to grow between 6.4% and 6.7% in fiscal year 2025 to 2026.

Despite the overall positive outlook, challenges remain. A significant concern is the recent increase in US tariffs on Indian goods. A steep U.S. tariff of 50% on goods from India took effect on August 27, 2025. These tariffs, which include a 25% penalty for buying crude oil from Russia, could impact exports and potentially slow down economic growth. BMI, a Fitch Solutions company, has revised down its GDP growth forecasts for FY2025/26 and FY2026/27 by 0.2 percentage points each due to the increased tariffs. Economists from Citigroup Inc. estimate the tariffs could reduce India's annual growth by 0.6–0.8 percentage points.

Chief Economic Adviser (CEA) V. Anantha Nageswaran acknowledged the potential impact of the US tariffs, stating that there will be some impact in the second quarter of the fiscal year. However, the CEA also highlighted several "silver linings" that point to a robust and improving economic environment. These include the "GDP deflator," where a decline in input costs such as crude oil, industrial metals, and raw materials has been beneficial. Further relief is expected through rationalisation of GST rates, reduction in the number of slabs, and simplification of processes.

India's manageable debt levels, strong forex reserves, and contained current account deficit provide insulation from external shocks. Moreover, the government's commitment to fiscal prudence has reduced the 10-year bond yield risk premium, lowering borrowing costs and contributing to a reduction in the cost of capital for the private sector.

Overall, while the Indian economy faces some external challenges, particularly from increased US tariffs, the underlying resilience and strong domestic momentum are expected to sustain high growth in the coming quarters. The government's focus on infrastructure development, fiscal prudence, and reforms are also expected to contribute to the continued growth trajectory.