India’s 8.2 per cent GDP growth in the July–September 2025 quarter places it firmly at the top of the global growth table, even as global demand weakens and trade frictions intensify. Yet beneath the headline lies a quieter discomfort: weak nominal growth, collapsing deflators, and a growing divergence between official GDP data and what firms, workers, and tax authorities are actually experiencing.
Why nominal growth matters more than the headline
While real GDP growth has accelerated steadily — from 7.4 per cent to 7.8 per cent and now 8.2 per cent — nominal GDP growth has moved in the opposite direction. The key reason is the sharp fall in the implicit GDP deflator, from 3.7 per cent to just 0.5 per cent.
This convergence of real and nominal growth is unusual for a developing economy like India. Economic life runs on nominal rupees: company revenues, wages, loan repayments, and tax collections. When nominal growth weakens, corporate earnings disappoint, tax buoyancy falls, and fiscal deficits widen automatically. Net tax revenues growing at 9 per cent in the first half of FY26 have already undershot Budget assumptions.
The problem of ‘optical’ real growth
Manufacturing and services gross value added (GVA) posted near 9 per cent growth in the quarter. But physical indicators tell a more modest story. Manufacturing output, as measured by the Index of Industrial Production (IIP), rose only 4.8 per cent.
This gap suggests that part of the surge may be optical — driven by low deflators, favourable base effects, GST rate cuts, front-loading of exports ahead of tariff deadlines, and festival-related inventory build-up. In other words, accounting effects may be amplifying growth on paper, even as real production gains remain limited.
A consumption-heavy, investment-light recovery
On the demand side, private consumption strengthened, aided by fiscal transfers, easier monetary conditions, GST cuts, and festive spending. Investment stayed positive but showed early signs of moderation.
High-frequency data underline this softening. According to the National Statistical Office, more than half of tracked indicators slowed in Q2 FY26. Only steel, cement, and commercial vehicles recorded robust physical growth. Core GDP growth — excluding statistical discrepancies — fell sharply to 4.1 per cent, reinforcing concerns that headline strength may not reflect broad-based activity.
Three risks shaping the FY26 outlook
The growth debate now turns on three near-term uncertainties.
First, the “GST sugar rush”. Was the consumption spike genuine demand or merely front-loaded festive buying? If inventories unwind, manufacturing orders and retail sales could cool quickly. The PMI slipping to 56.6 in November 2025 — a nine-month low — hints at this risk.
Second, tariff drag. Higher US tariffs on Indian exports add to an already fragile global trade environment. Export-oriented States and manufacturing clusters are especially vulnerable, with firms likely to delay investment and hiring amid uncertainty.
Third, data revisions. India will revise GDP and CPI base years in early 2026 and roll out a revamped IIP soon after. Past revisions have significantly altered growth trajectories. With deflators already distorting real–nominal relationships, these changes could force markets and policymakers to reassess risks mid-cycle.
The policy bind for RBI and the Centre
The expects growth to slow to 5.7 per cent in the second half of FY26, pulling full-year growth to about 6.8 per cent. Yet the macro mix is awkward: strong real growth, inflation near target, but weak nominal expansion.
Rate cuts cannot fix a deflator-driven nominal slowdown. Liquidity is ample, but private investment is constrained more by regulatory uncertainty and weak demand visibility than by borrowing costs. Fiscal choices are equally stark: without stronger revenues, the government must juggle public investment, welfare spending, and deficit targets.
Why composition matters more than speed
Even after adjusting for deflator effects, India remains one of the fastest-growing major economies. Consumption is supported by easing inflation and tentative rural recovery. But growth composition matters. A consumption-led expansion with moderate investment and weak exports can deliver short-term momentum, not the decade-long growth needed to absorb the nearly eight million workers entering the labour force each year.
Three shifts for more durable growth
A more sustainable strategy requires course correction.
First, reviving private investment. Private capex fell to 11.2 per cent of GDP in FY25, contributing only a third of total fixed investment — a decade low. The focus needs to shift from broad subsidies to regulatory clarity, faster execution, and sector-specific risk reduction.
Second, rebuilding export momentum. Despite accounting for just 3 per cent of global trade, India’s export growth remains modest. Deepening integration into global value chains, improving logistics and power reliability, and ensuring predictable trade policy are essential — especially as global trade fragments.
Third, modernising statistical systems. Credible deflators, updated base years, and better sectoral coverage are not technical niceties; they are policy assets. In an era of intense scrutiny, trust in numbers shapes investor and market confidence.
What to note for Prelims?
- Difference between real GDP and nominal GDP.
- Role of GDP deflators.
- Index of Industrial Production (IIP).
- RBI growth projections.
- Private investment share in GDP.
What to note for Mains?
- Risks of deflator-driven growth overestimation.
- Limits of consumption-led recovery.
- Investment slowdown and its structural causes.
- Export competitiveness in a fragmented global economy.
- Importance of credible statistical systems for policymaking.
