India recorded a strong GDP growth of 7.8 per cent in the first quarter of the fiscal year 2025-26. This growth followed the recent upgrade of India’s credit rating by Standard & Poor’s. The expansion was broad-based, with agriculture, manufacturing, and services all showing positive trends. Despite some concerns about the gap between nominal and real GDP growth, the economic data reflect India’s resilience amid global uncertainties.
Broad-Based Economic Growth
Agriculture maintained steady growth for four consecutive quarters. Manufacturing improved compared to the previous three quarters. The services sector experienced widespread expansion. Export growth was driven mainly by non-petroleum goods and services. Government capital expenditure surged by 52 per cent, signalling strong fiscal management. GST collections rose by nearly 12 per cent, supported by a 20 per cent increase in e-way bills, indicating robust economic activity.
GDP Estimation Methodology
India’s GDP figures are compiled using the benchmark-indicator method, combining volume and value indicators from diverse datasets. Volume indicators measure physical quantities while value indicators capture monetary transactions. Real GDP is calculated by adjusting for price changes using Wholesale Price Index (WPI) or Consumer Price Index (CPI). This method ensures comprehensive coverage of economic activities but limits direct comparison with model-based forecasts.
Role of GDP Deflator and Inflation
The GDP deflator reflects the ratio of nominal to real gross value added (GVA) and is influenced by inflation trends. In Q1FY26, inflation remained low with wholesale inflation at 0.3 per cent and retail inflation at a 25-quarter low of 2.7 per cent. This led to a GVA deflator of just 1 per cent. Low inflation reduces the difference between nominal and real GDP growth, explaining the observed narrow gap. Government policies and monetary measures contributed to this inflation control.
Producer Price Index and Deflation Techniques
A Producer Price Index (PPI) is crucial for accurately deflating intermediate inputs and outputs. India currently uses WPI as a proxy for PPI due to data limitations. Double deflation, which separately adjusts output and input prices, is considered ideal but requires extensive data. India applies single deflation in manufacturing, assuming synchronous movement of input and output prices. Future GDP revisions aim to adopt double deflation or volume extrapolation to enhance accuracy.
Service Sector Price Measurement Challenges
Price indices for services are less comprehensive than for goods. WPI covers only wholesale traded items, excluding many services. CPI weights are based on household consumption surveys, which do not fully align with national accounts’ private final consumption expenditure (PFCE) on services. Certain service components like imputed rent and financial services are not captured in household surveys. Ongoing revisions to the CPI aim to better represent the growing share of services in consumption.
Ongoing Data Revisions and Economic Outlook
India is updating its macroeconomic datasets and survey methods to improve GDP measurement. These revisions will incorporate new data sources and international best practices. Policy reforms, deregulation, and market diversification continue to strengthen India’s economy. The current GDP growth signals robust fundamentals despite external challenges.
Questions for UPSC:
- Discuss in the light of India’s economic growth, the role of fiscal policy and government expenditure in sustaining macroeconomic stability.
- Critically examine the importance of accurate price indices like Wholesale Price Index and Consumer Price Index in GDP estimation and inflation measurement.
- Explain the concept of double deflation and single deflation in national accounting. How do data limitations affect their implementation in developing countries?
- With suitable examples, discuss the challenges of measuring the service sector’s contribution to GDP and the implications for economic policy formulation.
