India reported a 7.8 per cent GDP growth in the first quarter of FY 2025–26. This figure positions India as the fastest-growing major economy globally. However, a detailed examination of sectoral data, inflation deflators, and government spending reveals a more complex and nuanced economic situation. While the economy is expanding, some indicators suggest the headline growth may be slightly overstated.
Sectoral Growth Overview
The services sector led growth with a 9.3 per cent increase, driven by finance, real estate, transport, and government services. This sector forms around 60 per cent of GDP but suffers from limited inflation data, which may overstate real growth. Manufacturing grew by 7.7 per cent, supported by urban demand. Yet, industrial production (IIP) showed slower gains, rising only 1.5 per cent by June 2025. Construction expanded by 7.6 per cent, largely due to government infrastructure spending. Agriculture grew modestly at 3.7 per cent, helped by good monsoon rains.
Industrial and Trade Signals
Industrial momentum weakened with IIP growth slowing from April to June 2025. Electricity consumption, a proxy for industrial activity, rose just 1.4 per cent in the first half of 2025. These trends suggest manufacturing GVA may be overstated. Merchandise exports grew only 1.9 per cent year-on-year. Overall exports rose 6 per cent but face headwinds from rising US tariffs. The goods trade deficit widened, signalling external sector stress.
The GDP Deflator Challenge
The GDP deflator adjusts nominal growth for inflation to estimate real growth. India’s deflator blends 60 per cent Wholesale Price Index (WPI) and 40 per cent Consumer Price Index (CPI). This method misses detailed service sector inflation, often using manufacturing proxies. In Q1 FY 2025–26, the deflator fell to 0.9 per cent, its lowest in six years, due to falling commodity prices and negative wholesale inflation. This low deflator inflated real GDP growth, making manufacturing and services appear stronger than other data suggest.
Role of Government Spending
Government Final Consumption Expenditure surged 9.7 per cent, more than double last year’s growth. This public spending boost is a key driver behind the headline GDP figure. Capital expenditure also rose by 7.8 per cent, mainly due to public sector investments. Private consumption grew 7 per cent but remains less dynamic than public spending. Private capital expenditure stayed subdued, denoting dependence on government stimulus for growth.
Implications for Policy and Investment
The growth momentum is real but partly inflated by statistical factors and heavy government spending. Policymakers need to improve inflation measurement in services and develop better high-frequency economic indicators. Investors should temper expectations, recognising that India’s economy is growing steadily but not at an explosive pace. Accurate data and cautious analysis are crucial for sound fiscal and monetary policies aligned with actual economic conditions.
Questions for UPSC:
- Point out the factors responsible for India’s recent economic growth and critically analyse the role of government expenditure in sustaining this growth.
- Underline the challenges in measuring real GDP growth in developing economies and estimate how inflation deflators can impact economic data accuracy.
- With suitable examples, explain the significance of sectoral growth disparities in shaping overall economic performance and assess their implications for policy formulation.
- Critically analyse the impact of global trade tensions on emerging economies like India and discuss the strategies to mitigate such external shocks.
