India’s GDP growth of 7.8 per cent in the first quarter once again exceeded expectations, continuing a pattern seen over the past several quarters. Growth surpassed both the median forecast of 6.8 per cent by professional forecasters and the RBI’s revised projection of 7 per cent. The outperformance underscores the strength of India’s domestic drivers and its ability to navigate an increasingly uncertain global environment.Even amid continuing conflict in West Asia and weather-related uncertainties, high-frequency indicators had signalled strong momentum across sectors. Robust industrial activity, healthy consumption and strong goods exports, alongside accelerating government investment, were the key drivers of growth in the first quarter of this fiscal.AdvertisementAlso Read | A strong quarter quickens pace, but risks remainThe residual impact of policy measures introduced last fiscal year, coupled with continued support through direct benefit transfers, also bolstered growth. Such programmes have expanded steadily, with 17 states now providing cash transfers, primarily to women.The impact of GST rate cuts was particularly visible in the automobile sector. Dealer discounts and higher disposable incomes resulting from income-tax relief provided additional support. According to data from the Society of Indian Automobile Manufacturers, sales of passenger vehicles, commercial vehicles and two-wheelers rose 26 per cent, 20.3 per cent and 18.3 per cent respectively in the first quarter.Retail credit growth remained robust with other personal loans, a proxy for short-term consumption, growing at 14.2 per cent. Also, households were cushioned against the sharp rise in crude prices with government and oil companies absorbing most of it, particularly in the initial phase of conflict.AdvertisementThat said, as 2026-27 progresses, the growth-inflation mix is likely to become less favourable, with growth moderating and inflation rising. Crisil expects GDP growth of 7 per cent and inflation of 5.1 per cent.The moderation in growth reflects a more challenging external environment, marked by disruptions from the conflict in West Asia, unresolved tariff issues with the US, weather-related risks and a strong base effect in the second half.The two exogenous factors that worked in India’s favour last year, low crude oil prices and a normal monsoon, are unlikely to provide similar support this year.Meanwhile, the conflict in West Asia has disrupted supply chains, increased insurance, freight and input costs, and is likely to weigh on both global and domestic growth.Weather-related risks also warrant close monitoring as El Niño conditions in the equatorial Pacific intensify. Over the past 25 years, five of the six El Niño years have resulted in below-normal rainfall.This year, cumulative rainfall was 14 per cent below the long-period average (LPA) at the end of August. July and August together account for 62 per cent of monsoon rainfall. While rainfall in July was 1 per cent above the LPA, August recorded a deficit of 16 per cent. The India Meteorological Department has also signalled below-normal rainfall in September.There are, however, some mitigating factors. India’s net irrigated area has risen by 10 percentage points to 59 per cent over the past decade, improving resilience to rainfall shocks. The country also holds ample rice and wheat stocks, which should help contain food price pressures.Agriculture itself is becoming more resilient as non-crop activities gain a larger share. While crop gross value added contracted by an average 0.5 per cent annually in the five years to 2023-24, non-crop agriculture, which now accounts for nearly 40 per cent of agricultural gross value added, expanded 6.5 per cent annually.Nor is the relationship between monsoons and inflation straightforward. Historical evidence suggests deficient monsoons do not always lead to higher food inflation. Foodgrain stocks, currently more than twice buffer norms, provide an additional cushion against price spikes.Even so, these structural improvements do not fully insulate agriculture or the broader economy. Several crops without buffer stocks, as well as perishable vegetables, remain vulnerable to adverse weather. Weak monsoons can also hurt rabi production by reducing soil moisture and lowering reservoir levels.Agricultural output and food inflation therefore remain key variables to watch.Although headline inflation eased to 4.5 per cent in July and core inflation remained benign, upside risks persist. Our base case assumes Brent crude prices averaging $82-87 per barrel this fiscal. The unresolved conflict in West Asia continues to keep oil prices volatile and could drive them significantly higher.Higher crude prices typically translate into slower growth, higher inflation and a wider current account deficit. We expect the current account deficit to widen to 1.5 per cent of GDP this year, with oil emerging as a key contributor.Core inflation, often viewed as a gauge of underlying demand pressures, also appears deceptively low. Strong demand conditions, rising fuel costs and other input pressures, reflected in near-double-digit wholesale price inflation, are gradually being passed through to consumers.The automobile sector illustrates this well. Vehicle prices are likely to rise as manufacturers pass on higher costs to protect margins, while dealer discounts are gradually withdrawn. Combined with a high base effect, this should moderate automobile growth in the second half.Unlike last year, when the RBI cut interest rates by 125 basis points, the balance of risks now points towards possible rate hikes. Persistent inflationary pressures, coupled with an unresolved conflict in West Asia and weather-related risks, could bring monetary tightening back into consideration.Despite the expected moderation in growth, India’s macroeconomic buffers remain strong. Foreign exchange reserves cover more than nine months of imports, while corporate and banking-sector balance sheets are in robust health.The Indian economy remains resilient, but the road ahead is likely to be less forgiving than last year. The challenge will be to sustain high growth in an increasingly complex and uncertain global environment.For now, tax relief and public investment continue to support activity. The Pay Commission’s recommendations should provide an additional boost to consumption when they are implemented.Beyond these cyclical tailwinds, however, sustained progress on structural reforms that enhance competitiveness will be critical to maintaining India’s growth momentum over the medium to long-term.Joshi is chief economist, Crisil Ltd