India's GDP growth defies oil shock but stirs up controversy

"Doomsayers were doomed and India bloomed… Yet again," wrote Indian Prime Minister Narendra Modi on X, reacting to smart first quarter GDP data that came out earlier this week, widely beating forecasts, but also sparking a major controversy over its credibility.

On the face of it, the 7.8% number was a shot in the arm for the prime minister who's recently faced scathing student anger over his government's handling of exam paper leaks and rising youth unemployment.

While those longstanding concerns have not gone anywhere, the better-than-expected growth print suggests that his government may have deftly weathered the Middle East oil shock despite heavy dependencies on imported crude.

According to Sajjid Chinoy, chief India economist at JP Morgan, India's "cyclical growth recovery" had been visible for the past six months, driven by a huge fiscal stimulus, including direct tax cuts in February last year, a reduction of consumption taxes in September and interest rates which have come off by about 1.5% since early 2025.

"But the question was, could India insulate that recovery from events in the Middle East, and this is where the government deserves enormous credit," Mr Chinoy told India Today news channel, adding that the urgency with which Delhi diversified its energy imports in the face of the Hormuz blockade helped the country protect its growth.

What also helped Asia's third largest economy power ahead amid the disruption in global energy markets was a strong acceleration in exports and a surge in private corporate investments, which has long been a point of great concern for economists.

Exports grew by a sharp 12% despite tariff uncertainties on the back of strong global demand and a weak exchange rate. Economists reckon a 15% slump in the Indian rupee against the US dollar may have helped companies improve their competitiveness, driving up demand for Indian goods.

Corporate India, meanwhile, seems to be finally putting money into new buildings and factories. India's gross fixed capital formation, which serves as a core indicator of total domestic public and private investment rose, nearly 12% in the first three months of this year.

"Non-government data also points to the fact that investment intentions of companies have gone up in recent months, with announcements especially concentrated in industries like data centres, renewable energy and metals," Madan Sabnavis, chief economist with the state-run Bank of Baroda, told the BBC.

"Of course, private investment is not broad-based yet, but these are definitely signs of a pick up."

While the robust numbers pushed several private brokerages to revise their full year growth forecasts upwards, they also stirred up a roaring debate online and a war of words between politicians.

Opposition leaders like Jairam Ramesh called the numbers "statistical gymnastics", accusing the government of repeatedly tweaking methodology to conceal what he said was "India's dire economic reality".

A former finance secretary also raised serious doubts, saying the GDP got a pop because it was calculated on the basis of newly revised numbers and a lower base for the same period last year - a view the government strongly rebuffed, saying revisions are a part and parcel of GDP calculations.

The government's view was supported by the World Bank's executive director for the country, Neelkanth Mishra, who said the new GDP series "cleaned up the data and also significantly improved the methodology", enhancing the credibility of the estimates.

But beyond the statistical minutiae, others like the former central bank governor Raghuram Rajan questioned why if the growth indeed was so rapid was India not creating more jobs or attracting more foreign direct investment.

To make matters worse, the stock markets also largely shrugged off the positive news.

The debate has muddied the picture for authorities who will have hoped the numbers would help them counter growing criticism about the uneven nature of India's growth trajectory.

There are also other more mundane reasons why it might be too early to celebrate a growth bump.

For starters, government spending is expected to ease off in the coming months as the compulsions to meet deficit targets get stronger. The impact of the goods and services tax cuts on spurring consumption is also soon likely to peter out, according to HSBC.

Moreover a sub-par monsoon and El Niño-like weather conditions have taken a toll on India's agrarian rural economy, which supports livelihoods for half of the country. As of 27 August, cumulative rainfall stood at 13% below the long-period average.

This will pose "clear risks to agriculture, rural demand and food inflation [even though] India appears better prepared than in past episodes", CareEdge, a rating agency, said in a note.

Sugar and onion prices have already spiked across the country, forcing the government to run special trains to cities to meet demand. India's retail inflation, meanwhile, hit a 15-month high of 3.9% in May and further rises are expected, with some economists predicting the rate will hit the upper band of the central bank's comfort level amid a weak monsoon.

Given the high-growth and high-inflation scenario, most brokerages are pencilling in a hike in borrowing costs. This, coupled with expectations of lower global growth (and hence lower demand for Indian exports), higher costs of inputs and energy because of volatile geopolitics could all mean this growth bonanza - credible or not - may well be nearing its peak.

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