India's economy unexpectedly picks up steam, but Trump's tariff effect looms

Highlights:

• India's April-June GDP up 7.8% y/y vs 7.4% prior quarter
• Growth driven by manufacturing, government spending, services
• Economists warn US tariff hikes to weigh on growth
• Say prolonged tariffs may cut growth 0.6-0.8 percentage points

India's economy unexpectedly gathered steam in the April-June quarter, defying expectations of slower growth even as a sharp rise in US tariffs on Indian imports threatens to weigh on business activity in coming quarters.

The United States doubled tariffs on Indian goods to as high as 50% on Wednesday over India's continuing imports of Russian oil. That ushered in the most punishing rate among US trading partners alongside Brazil and economists say the move could hurt exports including textiles, leather goods and chemicals.

Gross domestic product expanded 7.8% in the latest quarter in Asia's third-largest economy, the fastest in five quarters, from 7.4% in the previous three-month period, government data showed on Friday.

This was well above the 6.7% expansion economists had forecast in a Reuters poll.

Gross value added (GVA), seen as a more accurate measure of underlying economic activity, grew 7.6% in the three months to June, from 6.8% in the previous quarter. GVA excludes indirect taxes and government subsidy payouts, which tend to be volatile.

At this pace, India remains one of the fastest-growing major economies, despite an increasingly cloudy export outlook after US President Donald Trump's tariff hike.

The "surprise acceleration" in GDP growth in the April-June quarter means that "the economy is still on course to expand by a world-beating 7% this year, despite the upcoming hit from punitive US tariffs", Capital Economics said in a note.

"Despite the reciprocal penal tariff, we are maintaining our growth range (of 6.3%-6.8%) for full year," India's Chief Economic Adviser V. Anantha Nageswaran said at a press conference after the data release.

CONSUMER SPENDING RISES

Private consumer spending, which makes up about 57% of GDP, rose 7.0% year-on-year in April-June, compared with 6% in the previous quarter, as rural spending increased, and demand for durables and farm equipment such as tractors remained firm.

Prime Minister Narendra Modi's government has pledged support for sectors hit by US tariffs and has said it would propose tax cuts to spur domestic demand. It had earlier cut income taxes starting April this year.

"Private consumption is supported by tax relief, rate cuts, crops sowing, though households may defer discretionary purchases until proposed consumption tax cuts take effect in the festive season," said Aditi Nayar, chief economist at ICRA ratings agency.

Government spending rose 7.4% in the three months through June compared to a fall of 1.8% in the previous quarter, the data showed.

Capital expenditure increased 7.8% in the quarter, though some private firms were seen holding investments amid global uncertainty following Washington's tariff hikes since April.

Manufacturing output rose 7.7% year-on-year in April-June, the first quarter of India's fiscal year, against 4.8% in the previous quarter, while construction expanded 7.6%, easing from 10.8%.

The agriculture sector expanded 3.7%, compared to 5.4% in the previous three quarters.

US TARIFFS WEIGH ON GROWTH

Economists warned growth could slow sharply when the effects of the higher US import duties kick in.

Indian government sources have said New Delhi hoped the US would review the extra 25% tariff imposed this week, which took to 50% the rate charged on a range of Indian imports. But as yet there are no indications of renewed talks between the two sides.

The 50% US tariff could hit exports and have a "domino effect on employment, wages and private consumption," further dampening private investment and growth, said Madhavi Arora, chief economist at Mumbai-headquartered Emkay Financial Services.

Exporter groups estimate the tariffs could affect nearly 55% of India's $87 billion in merchandise exports to the US, while benefiting competitors such as Vietnam, Bangladesh and China.

Some economists warn that prolonged US tariffs could shave 0.6 to 0.8 percentage point off India's growth over a year, as weaker exports dent its appeal as an alternative manufacturing hub to China.

Additional tariffs imposed by the US on India could be "short lived", Chief Economic Adviser Nageswaran said.

"There will be some negative shock on manufacturing numbers for July-September quarter, but it is difficult to make a precise estimate," Nageswaran said.

While real GDP growth is holding up, nominal GDP growth, which factors in inflation, slowed to 8.8% in April-June quarter after averaging nearly 11% over the previous eight quarters.

Lower nominal growth is likely to weigh on corporate profits and benchmark equity indices.

India's rupee fell to a record low of 88.30 to the dollar on Friday as US tariffs bite, while its benchmark stock indexes looked set for a second straight month of losses.