Margin impact of West Asia tensions to soften GDP growth to 7.0% in Q1 2026-27: ICRA
Rating agency ICRA projects the year-on-year (YoY) GDP growth to have eased to a four-quarter low of 7.0% in Q1 2026-27 from 7.8% in Q4 2025-26. The slowdown is expected to be caused by the services sector (likely to ease to +7.9% in Q1 2026-27 from +9.9% in Q4 2025-26), even as the industrial (+7.7% in Q1 2026-27 against +7.3% in Q4 2025-26) and agricultural (likely to rise to +4.0% in Q1 2026-27 from +3.6% in Q4 2025-26) growth is expected to improve between these quarters. The overall expansion in gross value added (GVA) is likely to print at 7.2% in Q1 2026-27 (+7.9% in Q4 2025-26), ~0.2 percentage points higher than the expected GDP growth, as the latter may be weighed down by compression in net indirect taxes on products.
Aditi Nayar, Chief Economist, Head-Research & Outreach, ICRA said: “High frequency indicators across the industrial and services sectors have revealed a healthy picture of domestic volume growth in Q1 2026-27, belying the concerns of a fallout of higher commodity prices in the quarter on account of the West Asia conflict. However, oil refining companies experienced sizeable losses in Q1 2026-27, which would impact the GVA growth. On balance, ICRA projects the real GDP expansion to have eased to 7.0% in Q1 2026-27 from 7.8% in Q4 2025-26, in line with the Monetary Policy Committee’s growth forecast for the quarter.”
ICRA estimates the pace of YoY expansion in the services GVA to slow to ~7.9% in Q1 2026-27 from 9.9% in Q4 2025-26, amid a broad-based deceleration across all sub-sectors. As per the newly released data by the Ministry of Statistics and Programme Implementation, the YoY growth in 18 of the 19 Indices of Services Production eased in 2M 2026-27 compared to Q4 2025-26. Besides, business sentiments of services companies weakened materially in Q1 2026-27, with the pace of optimism dipping to the lowest level in five years, amid headwinds owing to the West Asia crisis as well as persistent wage cost pressures.
The YoY performance of a majority of transport and mobility-related indicators moderated in Q1 2026-27 relative to Q4 2025-26, including consumption of petrol, diesel, and aviation turbine fuel (amid price hikes), rail freight traffic, GST e-way bill generation, and commercial vehicle sales (albeit remaining healthy, aided by a low base and steady freight activity), even as the deterioration in some of these was partly driven by an unfavourable base. While service export growth improved between these quarters, the residential area sold in the top seven cities expanded at a slightly slower pace.
The Government of India’s non-interest revenue expenditure expanded by a healthy 19.5% to Rs. 6.7 trillion in Q1 2026-27, although slower than the 21.7% expansion seen in Q4 2025-26 (Rs. 9.1 trillion), amid an unfavourable base (Q4 2024-25/Q1 2025-26: -6.1%/+6.9%). In addition, the pace of expansion in the combined non-interest revenue expenditure of 24 state governments (excluding Arunachal Pradesh, Manipur, Mizoram, and Goa) slowed more sharply to a tepid 2.5% in Q1 2026-27 (Rs. 8.7 trillion) from 9.0% in Q4 2025-26 (Rs. 12.7 trillion).
ICRA estimates the industrial GVA growth to have risen to 7.7% in Q1 2026-27 from 7.3% seen in Q4 2025-26, led by all sub-sectors, barring manufacturing. As per the Index of Industrial Production data, while mining output remained in the contractionary zone in Q1, the extent of the same eased to 1.4% in the quarter from 1.8% in Q4 2025-26, as large rainfall deficit in June 2026 allowed an extended period for mining activity. Besides, electricity generation growth accelerated to a nine-quarter high of 9.3% YoY in Q1 2026-27 from 2.7% in Q4 2025-26. The same was boosted by a favourable base and the delayed onset of the Southwest Monsoon across several regions, which led to prolonged elevated temperature and increased cooling-related power consumption. Further, the trends in construction-related high-frequency indicators, were broadly positive in Q1 2026-27. While the pace of expansion in indicators such as infrastructure/construction goods, finished steel consumption, and medium & heavy commercial vehicles (trucks) registrations eased relative to Q4 2025-26, it remained at healthy levels.
Manufacturing volume growth improved to 6.3% in Q1 2026-27 from 4.7% in Q4 2025-26, the fastest pace in six quarters, though partly supported by a favourable base. This was despite a deterioration in the YoY performance in segments such as basic metals, coke and refined petroleum products, and chemicals and chemical products, which were partly impacted by tensions in West Asia during the quarter. However, other segments such as computer, electronic and optical products, electrical equipment, machinery and equipment, motor vehicles, trailers and semi-trailers saw a healthy uptick in their growth rates between these quarters, with the latter reflecting continued demand momentum post the GST rate rationalisation.
Amid the improvement in volume growth, the quarterly financial results of a sample of 978 manufacturing companies revealed that the growth in their aggregate sales improved between these quarters. However, their aggregate profits contracted in Q1 2026-27 following the expansion in Q4 2025-26, as the West Asia crisis-led surge in raw material costs resulted in losses for the oil refining companies. Consequently, ICRA estimates the manufacturing GVA growth to moderate to ~6.0% in Q1 2026-27 from 7.3% in Q4 2025-26, the lowest growth print since Q2 2024-25.
As per the third advance estimates of crop production, the rabi output of coarse cereals (+25.0% YoY), oilseeds (+9.4%), pulses (+11.1%), and rice (+12.3%) increased sharply in 2025-26. Besides, the output of most summer crops, barring rice, expanded compared to the year-ago levels. ICRA estimates the GVA growth of agriculture, forestry and fishing to grow by a healthy 4.0% in Q1 2026-27, up from 3.6% in Q4 2025-26, even as the disruption related to the uneven monsoons would affect the performance in the subsequent quarters.
“Based on the assumption of an average crude oil price of ~$80-85/barrel in 2026-27, ICRA expects the real GDP growth to moderate to 6.7% in the fiscal from 7.7% in 2025-26, with risks tilted to the downside amid continued tensions in West Asia and monsoon-related uncertainty. However, the nominal GDP expansion is projected to accelerate to a four-year high of ~13% in 2026-27 from 8.9% in 2025-26, amid expectations of a hardening in the inflation prints.” Nayar added.
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