Clipped from: https://www.thehindubusinessline.com/opinion/gdp-growth-raises-questions/article70460796.ece
High real growth above 8%, inflation near target, and muted nominal growth is an unusual combination
India’s growth is robust, but there is no room for complacency |
India’s 8.2 per cent GDP growth in July-September 2025 puts it comfortably at the top of the global growth league, at a time of weakening demand, fractured supply chains, and higher US tariffs.
The headline number signals resilience, but it also obscures a softer undercurrent: muted nominal growth, abnormally low deflators, and widening gaps between official output data, corporate results, and fiscal collections.
The nominal problem
While real GDP has accelerated from 7.4 per cent to 7.8 per cent to 8.2 per cent over three consecutive quarters (Q4 FY 2024-25 to Q2 FY 2025-26), nominal GDP growth has declined (see table below). This is driven by a collapse in the implicit price deflator from 3.7 per cent to just 0.5 per cent. Such convergence of nominal and real GDP growth rates is rare for a developing economy. For India, it’s a red flag.
Economic decisions are made in nominal rupees. Firms book nominal revenues; workers earn nominal wages; governments collect nominal taxes. When nominal growth weakens, corporate results miss targets, tax collections fall short, and fiscal deficits widen automatically. Net tax growth, at 9 per cent in H1 FY26, has already slipped below the Budget’s assumptions (of 10.1 per cent).
‘Optical’ real growth
Manufacturing and services GVA grew around 9 per cent in the quarter; buoyed by favourable base effects, sharply lower deflators, front-loading of export orders ahead of tariff deadlines, GST rate cuts, and festival induced inventory build-up.
But manufacturing IIP; actual physical output, rose just 4.8 per cent. The gap could be suggestive of the 9 per cent surge in manufacturing and services being ‘optical’, reflecting deflator compression and accounting quirks, rather than broad-based production gains.
On the demand side, private consumption picked up 90 basis points, helped by fiscal transfers, accommodative monetary policy, GST cuts, and festive stockpiling. Investment remained solid but showed early signs of moderation. India isn’t in a demand recession, but the growth impulse is clearly becoming consumption-heavy and investment-light.
Further, NSO’s press note shows that 12 of 22 high-frequency indicators decelerated in Q2 FY 26 vs Q1; only three of 18 physical-quantity measures (namely, steel, cement, commercial vehicles) grew faster than 6 per cent. Core GDP growth (excluding residual discrepancies) fell to 4.1 per cent in Q2; indicating that statistical adjustments, not real activity, could explain much of the headline acceleration. (Ref: The Paradox of a “Blazing” Economy That No One Feels, by Dhananjay Sinha, November 30, 2025)
FY26 outlook
The policy debate now needs to move beyond patting ourselves on the back, to three concrete questions.
GST sugar rush: Was the consumption spike durable demand increase, or front-loaded festive buying? If the latter, retail sales and manufacturing orders will cool once festival and contingent demand is exhausted and inventories normalise.
Indeed, manufacturing momentum is already showing signs of softness: PMI slid to 56.6 in November 2025, its weakest in nine months. Without sustained job and income growth, consumption alone won’t power 8 per cent growth for long.
Tariff drag: Higher US tariffs on key Indian exports come atop an already fragile global environment. Persistent trade barriers or fresh supply-chain disruptions will weigh on export volumes and factory orders, prompting firms to delay investment and hiring. Export-intensive States and manufacturing clusters face the sharpest pain.
Data googlies: India will revise base years for GDP and CPI in February 2026 and introduce a revamped Index of Industrial Production in May 2026. Past revisions have materially altered historical growth trends and sectoral weights.
At a time when deflators are already distorting the real-nominal relationship, these changes could force markets and policymakers to reprice risk mid-flight.
The Policy Bind
The Reserve Bank of India projects H2 FY26 growth at 5.7 per cent, pulling full-year real GDP to 6.8 per cent. Yet the dilemma is more nuanced: high real growth above 8 per cent, inflation near target, and muted nominal expansion is a combination that macro textbooks describe as rare.
Rate cuts cannot solve weak nominal revenues driven by collapsing deflators; the banking system is flush with liquidity, but private investment is constrained by regulatory uncertainty, lack of demand visibility and inadequate policy clarity rather than cost of funds. Fiscal arithmetic is equally harsh: absent dramatic improvements in tax efficiency or upside surprises in growth, the government must choose between boosting public investment and maintaining welfare schemes, or meeting deficit targets.
Better growth
Even adjusting for deflator-driven overstatement, India is growing faster than most large economies. Private consumption has support from easing inflation and tentative rural improvement. But composition matters more than the headline. The economy is increasingly consumption-led, with private investment moderate and exports underperforming. This mix can deliver a few good years; but it won’t sustain a decade-long expansion required for absorbing additions to the workforce that are estimated at eight million every year.
A more durable growth strategy requires three shifts:
Revive private investment: Private-sector investment slipped to 11.2 per cent of GDP in FY 2024-25, with private capex contributing only 33 per cent of gross fixed capital formation, a 10-year low (MOSPI). These trends highlight weak investment sentiment, underscoring the need for targeted interventions, e.g., focusing on improving the emerging industrial ecosystems via regulatory clarity, faster execution, and sector-specific de-risking; rather than across-the-board measures such as production linked subsidies.
Rebuild export momentum: Deepen integration into global supply chains with predictable trade policy and laser focus on logistics, power quality, and firm-level competitiveness. Export growth of 6.05 per cent in FY 2024-25 and of 5.86 per cent during April-November 2025 will certainly not suffice (total trade in goods and services, YoY growth rate, MOSPI, RBI).
Despite India’s modest share in global trade of goods and services (3 per cent, WTO, UNCTAD); we should accelerate exports, especially now when world markets are fragmented and trade is growing slower than GDP. The opportunity is real, and achievable.
Modernise statistical systems: Ensure deflators, base years, and sectoral coverage keep pace with structural shifts in the economy. In an era of intense data scrutiny, credibility of the numbers is a policy asset, not a technical footnote.
The bottom line
India’s 8.2 per cent headline deserves applause, but not complacency. The real test is not the next quarter’s number; it is whether this sprint can become a marathon. That requires less reliance on consumption spikes and more on the unglamorous work of reviving private investment, strengthening exports, and modernising the statistical apparatus. Get that right, and India will not just surprise the world with speed; it will impress with staying power.
Kumar is Chairman, Pahle India Foundation & former Vice Chairman Niti Aayog; and Karkun is Senior Fellow, Pahle India Foundation
Published on January 2, 2026
aniltikotekar4sme.com 