Clipped from: https://www.financialexpress.com/opinion/puzzling-growth/4097275/
Price deceleration may be signalling a serious demand constraint
India’s GDP Paradox: Why 8.2% Real Growth and a Falling Deflator Signal a Demand Squeeze
Even as India’s headline (real) GDP growth hit a six-quarter high of 8.2% in Q2FY26, with a steady year-on-year acceleration for four quarters in a row, the subdued nominal GDP expansion offered a contrasting picture. To be sure, in the three quarters to Q2FY26, real GDP growth rose from 7.4% to 8.2%. The nominal growth was on a steeper path, albeit downwards—from 10.8% to 8.7%. Such dichotomy has led to a rare convergence of nominal and real GDP, and triggered speculation that the economy may be seriously demand-constrained.
The apprehension is that the strong expansion in real output could largely be the result of weak price growth. The incompatibility between several high-frequency indicators and the quarterly GDP estimates is also a cause of concern. In Q2FY26, for instance, manufacturing and services grew around 9%, and private consumption expanded 7.9%. Under normal circumstances, these numbers must be reflective of an economy on a firm footing, with broad-based growth impulses.
Why ‘Optical’ Growth Masks Nominal Pain
However, the index of industrial production (IIP) grew just 4.8% in the July-September period, and reported just 0.3% increase in October. Though the index subsequently accelerated to a 25-month high of 6.7% in November, it was driven by festive-season consumption demand that appeared to fade. Manufacturing activity captured by the seasonally adjusted purchasing managers’ index was the weakest in nine months in November, and fell further to a two-year low in December.
The index decline reflected softer demand conditions and more cautious production strategies by firms. Physical parameters like railway freight, power consumption, and fuel sales aren’t keeping pace with the quarterly national income data either.
Investment Inconsistencies
In FY25, private investments accounted for just a third of gross fixed capital formation (GFCF). For the record, the share of the private sector in new investment projects rose steadily for three quarters in a row through Q3FY26. But that can barely be a solace, given that a sharp, inevitable slowdown in government investments resulted in a 6% fall in the aggregate value of new projects. Gross goods and services tax (GST) collections in the two full months after GST reductions were lower than the average of the April-October period. Corporate revenue growth, outside the banking and financial sector, lagged the Q2 GDP, at 5.3%. Also, real growth in GFCF, which averaged 8.2% in the three quarters to Q2FY26, is wholly inconsistent with the nominal GFCF growth.
The National Statistics Office measures the quarterly sector-wise gross value added (GVA) at constant prices by either estimating the value of output and material inputs and then the GVA, or computes the GVA using physical indicators. For the current-price estimates, the implicit price deflators are estimated using the prices data from the wholesale and consumer price indexes of the respective industry groups. Industry-wise deflators are then superimposed on the GVA at constant prices.
It appears that since the GDP deflator is abnormally low, the real GDP growth tends to be stronger than the underlying nominal production value. But what is being felt by the economic actors are the nominal rupees they earn. All this shows the foundation on which India’s growth is placed warrants a review. When the external sector is unsupportive and the economy almost fully driven by domestic demand, growth impulses might be weaker than official data suggests. By definition, the economy might be in a Goldilocks moment (barring the elusive full employment), but to take comfort in such terminology may be an unaffordable luxury at this instance.
aniltikotekar4sme.com 