Dear Reader,
The Indian economy continues to make practitioners of the dismal science look silly. Real GDP growth of 8.2 percent for the July-September 2025 quarter blew away all estimates. Most economists had expected growth to decelerate from 7.8 percent in Q1 to between 7 percent and 7.5 percent in Q2. The strong growth shows that the Indian economy has strong momentum, in spite of Trump’s tariffs.
One reason for the bounce in the real growth rate was the very low GDP deflator in Q2, which was as low as 0.46 percent, down from 0.9 percent in Q1. Retail inflation was 1.7 percent in the September quarter compared to 2.7 percent in the June quarter. The wholesale price index growth was 0.02 percent in Q2 compared to 0.26 percent in the June quarter. The GDP deflator is supposed to reflect the overall inflation in the economy and at 0.46 percent it’s flirting with deflation.
But perhaps all that it really reflects is a problem with the method of computing the deflator, as the IMF has graded India’s national income statistics at C, the second-lowest grade. At the same time, it's also true that everybody knows the problems with the data and the estimates should have reflected that. That the numbers have beaten the estimates and by such a wide margin reflects the strength of the Indian economy.
There was also a base effect that boosted growth. Base effect refers to how growth rates are calculated against the previous year's quarter — Weak growth last year makes this year's numbers look better. Note, though, that there was also a favourable base effect for nominal growth and yet nominal GDP growth fell slightly from 8.8 percent in Q1 to 8.7 percent for Q2.
Private consumption growth at constant prices has been strong at 7.95 percent in Q2, compared to 7.05 percent in Q1. Growth in gross fixed capital formation, on the other hand, has been lower than in Q1. But these numbers should be taken with a grain of salt — ‘discrepancies’ amounted to 3.3 percent of GDP. These ‘discrepancies’ will later be allocated to the other heads.
The Gross Value Added numbers give a more reliable picture. While growth in manufacturing went up from 7.7 percent in Q1 to 9.1 percent in Q2, the truth is the base effect was very strong. Q1 FY2025 had a manufacturing growth rate of 7.6 percent and that slumped to 2.2 percent in Q2. In construction, despite a favourable base effect, the growth rate fell from 7.6 percent in Q1 FY26 to 7.2 percent in Q2.
The real buoyancy was in one particular part of the services sector. GVA growth in the ‘Financial, Real Estate & Professional Services’ went up from 9.5 percent in Q1 to 10.2 percent in Q2, in spite of an unfavourable base effect.
What of the future? The GST cuts should continue to boost consumption, but note that the base effect for GDP growth turns unfavourable from Q3. The deflator too may not remain so supportive. On the flip side, a US trade deal with lower tariffs should lead to higher exports and will support growth.
As of end-October 2025, gross tax revenues for the fiscal year were up a mere 4 percent compared to April-October 2024. The low growth in nominal GDP combined with the tax cuts, is having an impact. Corporate earnings growth too will feel the knock-on effects.
The immediate question, of course, is whether the RBI will look at the solid real headline growth rate and the robust consumption growth and decide not to cut rates, or whether it will look beneath the hood and decide that things are not as rosy as they appear to be.
Cheers,
Manas Chakravarty
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