OPINION | India’s GDP outperformed all expectations in 2025, but low nominal growth’s got downsides

Policy coordination cushioned the economy from shocks

Fiscal and monetary policies have played a key role in mitigating the impact of external shocks. Rationalisation of income tax and goods and service tax (GST) rates, the government’s continuing infrastructure capex drive, and the RBI’s rate cuts have kept domestic drivers of growth robust.

A bigger focus on boosting the middle-income segment this year is apparent. Mass consumption items such as processed foods, milk, clothing, footwear and entry-level automobiles have seen greater GST cuts. This segment also enjoyed a relief on income tax payments.

Disinflation boosted purchasing power

Possibly the most encouraging news of the year however, has been low inflation, which has created space for monetary easing and improving purchasing power for consumers. Inflation based on the Consumer Price Index printed below expectations (1.9% average between April-October 2025), with inflationary pressure muted across food, fuel and core inflation. Healthy food supplies have ensured food prices remain low. Benign global crude prices have helped fuel inflation stay low.

Private consumption, the biggest driver of India’s gross domestic product (GDP), has benefited the most from all that. Urban economy, which was lagging rural until last year, has seen a steady pick-up, aided by tax relief and falling lending rates. Rural demand has held strong but some damage to crop yields and incomes from excess rains and low output prices remains monitorable.

Flip side of low inflation

This year has also shown the flipside of very low inflation. Low output prices have limited agricultural incomes as well as corporate earnings. Low nominal GDP growth has tempered government’s tax revenues and created an unfavourable setting for ratios linked to GDP such as fiscal deficit and current account deficit.

Nominal GDP slowed to 8.7% on-year in the second quarter from 8.8% in first quarter of this fiscal, in contrast to real GDP growth rising to 8.2% from 7.8%. The gap between nominal and real GDP is the lowest post-pandemic, due to ultra-low inflation.

Slowing nominal GDP growth, has particularly come as a challenge to government’s fiscal management in a year government pushed ahead with tax relief measures—both direct and indirect.

Tax collections of the Centre have grown only 4% between April and October 2025, way below the fiscal 2026 target of 11% growth.

Bond yield remain somewhat elevated

Fiscal concern is one of the factors keeping bond market yields somewhat elevated. Bond yields have surpassed 6.5% even after the RBI’s fifth rate cut earlier this month and the announcement of additional open market purchases of government securities.

Large bond issuances from states have also kept the supply of bonds high this fiscal. Gross market borrowing of states in first eight months of this fiscal were 18.7% higher on-year.

Government capex may moderate

As the government moves closer to its fiscal targets, we expect a moderation in its capex, leading to tempering of GDP growth in the second half of this fiscal. Although better capacity utilisation should encourage private investment in some sectors, better clarity on the US-India trade deal and settling of global uncertainty will be critical for a full-fledged recovery.

While exports benefitted from frontrunning in the first half of this fiscal, the pressure is likely to become more visible in the second half, unless a US-India trade deal brings down tariffs. Labour-intensive sectors such as gems and jewellery and textiles are most vulnerable to these tariffs. The timing of US-India trade deal, and diversification of exports to other economies remain monitorable.

Global environment provides mixed picture

Meanwhile, the global economic environment provides a mixed picture. While financial and currency markets remain nervous, the real economy has held up growth driven by export frontloading, policy support measures and stronger household and corporate balance sheets and, for some economies, the artificial intelligence (AI) investment cycle.

S&P Global expects global growth at 3.2% in 2026, stable as 2025 and higher than the past decade’s average. The trade scenario, however, remains unpredictable.

Against this backdrop, the Indian economy’s growth path in the near-term will be steered by tariffs and trade prospects, policy support from monetary and fiscal quarters and ongoing structural reforms.

Next fiscal, we expect growth to moderate to 6.7% due to a high base, some tempering of government capex to meet fiscal consolidation goals, and weaker exports. Macro tailwinds driving consumption should, however, remain supportive through most of next fiscal.

Indian economy’s outperformance should continue

To be sure, resilience has become a running theme of the India story. The nature of shocks has varied over the past five years, ranging from pandemic to geopolitical tensions and US tariffs and increasing in intensity. Some short-term disruption on India’s macros therefore is inevitable.

However, from a broad perspective, strong macroeconomic fundamentals healthy corporate balance sheets and robust financial system metrics give India the heft to face some of these global blows.

GDP growth is trending a tad above the decadal average, too, while inflation and current account deficit are trending below average. Add fiscal prudence and sustained reform momentum, and the Indian economy appears set for continued outperformance amid global uncertainties.

(The authors are Principal Economist and Senior Economist, respectively, at Crisil.)

Views are personal and do not represent the stand of this publication.