As Good as it Gets?

Political & Policy Issues to Watch . A (mostly) washed-out Monsoon Session… Parliament’s strife-ridden Monsoon Session ended in mid-August, having achieved modest legislative progress. A total of 11 bills found passage, including some of a minor nature or, like one raising the penalties for leaking public exams, speedily drafted in response to public outrage. An amendment to the mining laws gives the Central government greater oversight of the sector while limiting states’ ability to impose levies. Another bill sets up a National Tribunals Commission that will be responsible for appointing members of various bodies. On the other hand, the government’s hopes of passing laws on delimitation, simultaneous elections and a tighter FCRA Act were dashed. A host of other sector-specific laws also remain pending.

. …and the growing likelihood of a Cabinet reshuffle With only months to go for important state elections, including in UP, Uttarakhand and Punjab, recent opinion polls indicate softening public support for the NDA government. This, and a likely growth slowdown in the near term, which will impact rural India most of all, may push it to announce populist, mood-boosting measures in the coming months. At the same time, a long-delayed Cabinet reshuffle remains on the cards. Aside from electoral compulsions, what makes this likely are recent changes to the BJP’s central structure, the impending retirement (coinciding with expiring Rajya Sabha terms) of several ministers, and the fact that several key individuals now hold multiple portfolios. Once effected, the reshuffle should bring new urgency to policymaking.

. US ties remain contentious, but the China one may be warming

With the US mid-term elections drawing closer, the likelihood of the Indo-US trade deal being concluded has fallen sharply. Recent signals from India – including a statement by Commerce Minister Piyush Goyal that India expects the final US tariff framework to treat India on par (or better) than countries like Vietnam and Bangladesh – suggest a hardening of positions that bodes ill for a quick resolution. At the same time, India is ramping up its engagement with other key countries, including China and Russia. PM Modi attended the recent Shanghai Cooperation Agreement (SCO) summit in Kyrgyzstan, pressing again on Vladimir Putin to end the Ukraine war while ensuring that terrorism found prominent mention in the Bishkek Declaration. More crucially, the early-September BRICS Summit in Delhi is expected to give fresh impetus to Sino-Indian ties, especially if a rumoured Modi-Xi meeting (the first such since 2019) occurs.

. Outlook for the Market . Growth surprised on the upside in Q1… Once again surprising on the upside, India’s Q1 (Apr-Jun) GDP growth stood at 7.8%, well above industry forecasts of 7.1-7.2%. Coming on the back of last year’s unexpectedly strong 7.7% and an upwardly revised 6.9% (from 6.8%) in the first quarter of FY26, the numbers have raised eyebrows. Particularly striking is the small, ~2.5% gap between nominal (10.3%) and real growth, which was well below reported inflation, either retail (4.5%+) or wholesale (9%+), in the same three months. This makes a later, downward revision to the Q1 numbers a distinct possibility, especially after factoring in the recent spurt in inflation.

While manufacturing grew by a robust 9.2% and public utilities (mainly electricity) by 8.9%, services grew even faster, averaging 10%, led by financial, real estate and related services (12.1%) and supported by strong public-sector spending. Private expenditure grew strongly (7.1%) but investment, mainly on the public-capex side, grew by as much as 11.9%. On the other hand, agriculture slowed to 3.6% and the mining and quarrying sector saw degrowth (-2.4%). Looking ahead, with the monsoon rainfall numbers firmly in the ‘deficient’ range, particularly in Southern and Eastern India, agricultural growth will almost certainly dip into the sub-2% range in Q2 and Q3.

…but that may have been the high point of FY27

While the broader GDP numbers are encouraging, they may represent the year’s high point, with several major lead indicators pointing to a slowdown. The HSBC PMI Services index managed to hold steady in Q1, averaging 58.7, but dropped markedly in both July (53.3) and August (54.1). The Manufacturing index, by contrast, has hovered in the sub-55 range since March, well below its FY26 average of 57.3. Added to this, while July and August saw 7%+ growth in GST receipts (up from 1.5% in Q1), e-Way bill issuances – a barometer of the volume of economic activity – were up by just 6.8% in those two months, compared to a near-20% average last year. According to market research firm Nielsen, FMCG sales volumes declined by 2% in Q1 while value grew by a marginal 0.8%. The situation was worse in rural areas, with volumes declining by 5%, compared to (-) 0.1% in urban India.

. There are several bright spots…

This is not to say that there are no pockets of growth. Auto sales continue to boom, with last month seeing new August records for both two-wheelers (17.1mn units, up ~20%) and passenger vehicles (over 400,000 units, up 16%). Commercial vehicle dispatches were also up sharply, though tractor sales, given a weak monsoon, turned flat. Exports (up 19.6% in July) and imports (up 17.5%) are also holding firm. Finally, FII inflows ($5.2 bn cumulatively in July and August) appear to have resumed, after months of outflows. This will help both, steady the Indian currency and instil some confidence in the financial markets, with a knock-on effect on consumer spending.

…but also, no shortage of risks

However, substantial downside risks remain. A resumption of hostilities in the Gulf will again drive up oil prices, possibly past the $100/barrel mark in the near-term, disrupt supply chains and weigh on overall economic activity. Rising bond yields in major Western markets will also push up financing costs across the board and exert downward pressure on the rupee. Finally, rising inflation – retail prices were up nearly 4.5% in July, while the WPI and PPI (producer price index) were up by 9.8% and 9.6%, respectively – will continue to impact margins, dent consumer confidence and possibly compel the RBI to raise rates later this year, particularly if the US Federal Reserve acts first.