India’s economy has once again surprised us positively. The National Statistics Office reported that GDP grew by 7.8% in real terms in Q1 FY 2025-26, with nominal GDP expanding by 8.8%. These are not small achievements: in a world still grappling with sluggish global trade, sticky inflation in advanced economies, and geopolitical flux, India has delivered a quarter of strong and broad-based growth.
However, just as the numbers were released, another story broke across the headlines: the US imposed punitive 50% tariffs on a swath of Indian exports - from textiles and shrimp to gems and leather goods - in retaliation for India’s continued imports of discounted Russian oil.
Within days, the rupee tumbled past ₹88 per dollar, hitting an all-time low, and forecasters began trimming India’s growth outlook by 0.6-1 percentage point for the coming quarters.
Taken together, these developments force us to read the Q1 data not just as evidence of strength but as a test of resilience in the face of external shock.
The Domestic Growth Engine: Still Roaring
At ₹47.9 lakh crore (constant 2011-12 prices), Q1 GDP was significantly higher than the ₹44.4 lakh crore recorded a year ago. More importantly, the growth is not narrowly driven: agriculture and allied activities grew 3.7%, up from 1.5% last year. Manufacturing (7.7%) and construction (7.6%) led industrial recovery. The services sector surged by 9.3%, with financial, real estate, and professional services expanding by 9.5%, and public administration and defense by nearly 10%.
Together, these sectors pushed the Gross Value Added (GVA) up by 7.6%, reflecting real production strength. Inflation remained benign, with CPI falling to 2.7% and WPI near flat at 0.3%, providing a rare mix of high growth and price stability.
Beyond output numbers, India’s export basket is gradually moving up the Product Complexity Index (PCI). According to the Atlas of Economic Complexity, pharmaceuticals (PCI +1.8) and automotive components (PCI +1.2) are examples where India has already entered higher complexity sectors, signalling that domestic growth is being matched by structural upgrading in what India produces and exports.
On the demand side, private consumption (PFCE) grew by 7%, investment (GFCF) by 7.8%, and government spending (GFCE) rebounded with 7.4% real growth. Capital goods output rising 10% signals private sector capacity building, while strong steel and cement demand validates the infrastructure push.
In short, India’s growth model is powered by domestic consumption and investment, not exports. This is precisely why the tariff shock, while significant, may not derail the momentum - at least not immediately.
The US Tariff Shock: External Vulnerability Exposed
The US tariffs have landed at a delicate moment. They target labour-intensive MSME sectors - textiles, apparel, gems, and seafood–that employ millions. Exporters face the daunting prospect of losing their competitiveness overnight in their largest developed-world market. Early estimates suggest that annual export losses could exceed $10-12 billion.
Based on UN Comtrade (HS-6, 2023), India’s exports of textiles and gems to the US yield a Herfindahl-Hirschman Index (HHI) of 0.27, showing concentration well above the 0.18 diversification threshold. This concentration explains why tariffs in a single market create a disproportionate vulnerability.
Diversification is not just a strategy - it is a resilience imperative.
The macro implications are serious.
1) Growth drag:Analysts warn up to 1 percentage point shaved off GDP growth over the next year
2) Currency strain:The rupee’s slide past 88 per dollar shows that external balances are under pressure.
3) Trade deficit risk:Imports rose by 10.9% in Q1, while exports grew by only 6.3%. Tariffs could further widen this gap.
The irony is stark: just as India posts one of its strongest domestic-driven growth quarters in years, global geopolitics threatens to puncture that optimism.
Resilience Factors: Why This May Not Be 2013 Redux
It is tempting to draw parallels with the 2013 “taper tantrum.” However, today’s macro fundamentals appear stronger.
1. Domestic demand is dominant:Over 60% of GDP comes from consumption and nearly 30% from investment.
2. Forex reserves are strong:With reserves above $600 billion, the RBI has room to smoothen validity.
3. Sectoral cushioning:Pharma, IT services, electronics, and petroleum products - India’s big-ticket exports remain largely outside the tariff net.
WITS data show India’s Revealed Comparative Advantage (RCA) in pharmaceuticals remains above 3.0, confirming structural competitiveness rather than opportunistic cost advantage, it is among the highest globally. These are sectors where India competes not only on cost but also on capability, ensuring resilience, even when traditional MSME sectors face headwinds.
This does not eliminate the shock; it merely implies that India entered this crisis with greater buffers and structural resilience.
Policy Choices: Turning Crisis into Catalyst
The challenge now is not just to absorb the tariff shock but to convert adversity into reform momentum:
# Diversifying export markets:Europe, Africa, and Latin America are natural destinations for MSME products now priced out of the US market. Policy support for trade finance, logistics, and marketing can accelerate this pivot.
# Deepening domestic value chains:The tariff crisis underscores the need for “Make in India, Sell to the World” with deeper integration into electronics, green tech, and pharmaceuticals.
# PCI + HHI targets: The policy should explicitly target raising India’s weighted PCI by 0.25 points by 2030 and lowering HHI for key MSME exports from 0.27 to below 0.18. Meeting these measurable goals will signal not just growth, but also smart, complexity-driven growth.
# Support affected sectors:Credit guarantees, targeted tax relief, and domestic procurement schemes can soften the blow for MSMEs in textiles, seafood, and handicrafts sectors.
# Reinforce macro stability:The RBI must walk a fine line by supporting the rupee without draining reserves, keeping inflation anchored, and ensuring liquidity for investment. Meanwhile, fiscal policy should continue to prioritise infrastructure.
Looking Ahead: Growth at a Crossroads
India is among the very few major economies sustaining growth above 7% while also expanding into higher-complexity products. This positions India to capture a larger share of global value chains at precisely the moment when diversification away from China is accelerating.
India’s Q1 GDP print indicates that domestic growth is firing on all cylinders. Agriculture is recovering, the industry is reviving, and services are soaring. Investment is finally becoming the foundation of expansion.
However, the US tariffs remind us that India does not grow in isolation. A world where trade policy can shift overnight, currencies swing violently, and geopolitics dictates economics is a world where resilience must be engineered, not assumed.
If India can use this moment to diversify exports, strengthen domestic supply chains, and accelerate industrial deepening, it will not only weather the storm but also emerge stronger. The 7.8% growth of Q1 may then be remembered not as a peak before turbulence, but as the moment India proved its capacity to grow despite global disruption.
(Bidisha Bhattacharya is Associate Fellow & Lead Research, Centre for Economy and Trade, CRF.)
Views are personal and do not represent the stand of this publication.
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