India’s economic growth in the first quarter of FY2025-26 came as a big surprise. The economy clocked a five-quarter high growth of 7.8%, defying expectations of a slowdown.

       Mint looks at the numbers closely to explain the sudden jump in gross domestic product (GDP) growth, positive and warning signs they throw up and what the future outlook is like.

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       India’s GDP growth rate for the quarter ended June, which came in at 7.8% in real terms, surpassed all expectations. But the growth in GDP by another measure has economists and policymakers worried: the economic output in nominal terms.

       At 8.8%, nominal GDP growth was only one percentage point higher than the real growth rate, reflecting the impact of the ongoing phase of low inflation in the country. This is a drop from 10.8% in the preceding quarter.

       The outlook for the coming quarters is bleak due to the expected impact of the US’s steep tariffs on India. Economists estimate the nominal growth rate will slide to 7.5-8% in the full year FY26, with a real growth rate of 6-6.5%.

       The statistics ministry released the GDP data on Friday. Output estimates are based on prevalent price levels in the economy (“nominal"), but some of the growth comes on the back of inflation. So they are adjusted for inflation to derive “real" growth as a better measure—when inflation is low, that adjustment is low, lifting real growth.

       However, nominal growth remains crucial as it forms the basis for the government’s Budget estimates and has an impact on growth sentiments.

       Also Read | India's GDP numbers beat expectations. But the devil is in the details

       Only five times in the past decade has nominal GDP growth slowed in a quarter while real GDP has accelerated, a Mint analysis showed. In Q1, both retail and wholesale inflation had been low, but in the previous instances, the trend was largely due to low wholesale inflation. Inflation will likely stay low through this year, which could keep the gap between real and nominal GDP growth small.

       To meet the government’s initial Budget estimate of GDP for FY26 ( ？356.98 trillion), the economy needs to grow by around 8% in nominal terms this year, or it could curtail fiscal room for the government, especially at a time when more space is needed to iron out the disruptions caused by the US tariffs.

       Spillover effect

       When the Centre makes its Budget estimates at the start of a year, the ratios of key figures with the nominal GDP (e.g. fiscal deficit as a percentage of GDP) are of great importance as targets. If growth stays behind and the ratio targets must still be met, parts of the Budget assumptions, too, must be cut down.

       For example, in the worst-case scenario, if GDP growth does end up at 7.5% in FY26, the government will have to cut its fiscal deficit by ？6,578 crore and debt by ？83,919 crore to maintain the targeted ratios of 4.4% and 56.1%, respectively.

       Similarly, the room to spend will also be curtailed by ？21,237 crore even if revenue generation remains intact. In reality, slower nominal growth could impact revenue generation, further shrinking the fiscal space.

       Madhavi Arora, chief economist at Emkay Global, who estimates FY26 nominal growth at 7.6-7.9%, said it would make it difficult to meet the tax collections target and lead to recalibration of key fiscal indicators. “Any slippage on nominal growth would imply much higher compression of fiscal deficit to achieve the same improvement in debt-to-GDP dynamics," Arora said.

       Also Read | RBI at fork in the road, experts back chasing headline inflation

       Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership (estimate: 7.5-8%), explained that the risk is that weaker nominal growth can have broad spillovers, including an impact on fiscal metrics and consumer sentiment. “The situation we have currently is that sales volumes for the manufacturing corporate sector have been sluggish, and that is a sign that weak nominal growth is not merely statistical," he added. This risks creating a negative loop of weaker sales, weaker wage growth and weaker demand.

       Taxing trend

       Government finances are already strained, with the proposed revamp in the goods and services tax (GST) slabs likely to reduce collections and tariff risks expected to increase expenditure needs. While the government has been front-loading capital expenditure this year (it is already up by 32.8% year-on-year in April-July), tax collections have been weak (up only 0.8% in the first four months).

       Also Read | Modi's GST 2.0 is a high-stakes bet on the Indian consumer. Will it work?

       Tax collections need to grow 10.8% in the year to meet the Budget estimates, which looks improbable given the weak momentum so far and the gloomy outlook ahead.

       The silver lining is that the income tax cuts announced in the Budget and the proposed GST revamp could provide an impetus to consumption, but that is unlikely to reflect immediately.

       Moreover, actual nominal GDP growth has undershot the initial Budget target six times in the past ten years. This could very well play out in the current fiscal year as well. FY25 had ended with 9.8% growth, and FY26 could see even a lower figure, upsetting the government’s noteworthy fiscal consolidation roadmap in recent years.

       Weeks before what is likely to be the Federal Reserve’s first interest-rate cut of the year, an unprecedented effort by President Trump to reshape the central bank is scrambling the dynamics on its policy committee.

       In an Aug. 22 speech, Fed Chair Jerome Powell opened the door to a rate cut at the Fed’s Sept. 16–17 meeting to cushion a weaker labor market. While a quarter-point reduction from the current 4.25% to 4.5% target range still looks all but assured, the breadth of support for that cut among Fed officials, and what comes after, have been thrown into doubt.

       This week, Trump moved to fire Fed governor Lisa Cook over allegations of mortgage fraud, the first time a president has tried to dismiss a governor in the central bank’s 111-year history.

       Cook sued to block her removal, and initial arguments in Washington, D.C., federal district court Friday left it unclear whether Cook was still serving or would be able to vote at the September meeting.

       The court fight over Cook’s position strains internal Fed unity. Cook named Powell a defendant in her suit because she wants a judge to rule that he can’t bar her from the Fed. Neither Powell nor the Fed has taken a position on the case. In court Friday, the Fed asked only that the judge, Jia Cobb, rule quickly, “to remove the existing cloud of uncertainty."

       Interest rates are set by the Federal Open Market Committee, composed of a board of seven governors in Washington nominated by the president and confirmed by the Senate, and five presidents of the 12 regional reserve banks on a rotating basis.

       Besides Cook, the governors consist of Powell and two Biden administration appointees who, like Cook, consistently vote with him, and two governors appointed by Trump in his first term, both of whom in July dissented in favor of a rate cut. Trump has nominated Stephen Miran, a close adviser who has also backed rate cuts, to an open seat on the board.

       Miran’s confirmation hearing before the Senate Banking Committee is set for Thursday. If the full Senate confirms him quickly enough, he could join the Fed in time for the September meeting, meaning at least three Trump-aligned governors strongly backing the president’s demand for rate cuts.

       If courts rule that Cook can be fired, Trump has told advisers he would move quickly to nominate her successor, which would give his appointees a four-to-three majority on the board. That confirmation would be difficult to accomplish before the September meeting, but Cook’s absence alone could leave the board evenly split between three Trump appointees, two Biden appointees and Powell.

       While support for at least a quarter-point cut has built across the FOMC, there are skeptics on both sides. “Inflation remains too high, and therefore policy should remain modestly restrictive," Kansas City Fed President Jeffrey Schmid said in a speech earlier this month.

       Meanwhile, some analysts anticipate that Michelle Bowman or Christopher Waller—both appointed by Trump—could press for a half-point cut. Waller, however, in a speech in Miami Thursday backed a quarter-point cut unless the economy weakens substantially.

       “I would not be surprised if on an ongoing basis here, we get dissents quite regularly," said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist.

       High-profile dissents could sow confusion among investors trying to discern who will control the path of rates over coming months: Powell or the growing contingent of Trump appointees. Adding to the uncertainty, candidates to succeed Powell as Fed chair next May have been auditioning for the role in the media, calling for lower rates.

       The pressure on the Fed from the White House and Cook’s case have put enormous weight on Powell, whose job is to forge consensus among FOMC members. During his tenure as chair, Fed officials have cast 661 policy votes, and only 18 have been dissents.

       “Powell is going to be trying to keep the upcoming meetings as ringfenced as possible from all the pressures and questions floating around the Fed institutionally," said Krishna Guha, vice chairman at Evercore ISI.

       Through July, most Fed officials were broadly hesitant to cut interest rates, though they assessed that rates were high enough to lean against economic growth. Their concern was that rapid economic-policy changes from the White House, including new tariffs and a broad immigration crackdown, could spark a return of the inflation that haunted the economy during the early 2020s.

       At the Fed’s annual Jackson Hole conference, Powell said his perception of the risks has shifted. Unemployment has stayed modest, but after seismic downward revisions to job creation landed in early August, the labor market now appears weaker, in “a curious kind of balance that results from a marked slowing in both the supply of, and demand for, workers," Powell said.

       Further risks to the labor market help make the case for a coming rate adjustment, Powell said. Before its September meeting, the Fed will get one more look at official employment data in the monthly jobs report for August to be released Friday.

       Write to Matt Grossman at matt.grossman@wsj.com