OPINION | Why India’s new GDP math faces a Middle Eastern stress test

The revised GDP numbers highlight that India’s macro stability indicators remain conducive.

The new rebased GDP series was essentially a statistical reset designed to better reflect the true structure and momentum of the economy. A granular understanding of the economy’s composition is especially important for sectors such as manufacturing and trade. In a global environment that remains uncertain and less supportive, marked by supply chain disruptions, geopolitical tensions, and uneven demand conditions, clear and reliable economic data becomes a critical input for policy formulation, investment planning, and business strategy.

Besides the change in the base year, a number of methodological revisions and new data sources have been incorporated into the calculations. These include a better gauge of the household sector using regular annual surveys rather than proxy indicators; GST and e-Vahan databases to capture private sector activity; Public Finance Management System data to incorporate actual expenditure instead of revised estimates, which come with a lag; refined deflation techniques; segregation of multi-activity corporations; and expansion of the corporate sector database to include digital services, intermediary platforms, and related activities, reflecting structural changes in the past decade, along with other technical improvements.

Growth Momentum and Cyclical Recovery

While expectations were that a more accurate representation would increase the size of the economy, counterintuitively the revised nominal GDP was around 3–4% smaller than the previous series. This was primarily due to softer private consumption, as well as a lower share of investment on the demand side and weaker performance in trade, hotels, and transport under the supply breakdown.

Growth rates, in contrast, were slower in the past two years and marginally higher in FY26 versus the first advance estimate, aligning with our 7.7% forecast. Encouragingly, a mix of regulatory, fiscal, and monetary support has resulted in a cyclical upswing in FY26 growth momentum, which we expect to spill over into FY27, where another 7% outcome should not be surprising.

Fiscal Math and the Denominator Effect

Incorporating the new growth numbers and their implications for macro stability, amid ongoing geopolitical tensions, there will be a meaningful but modest change in fiscal ratios. With the FY26 economy now estimated at INR 345 trillion versus the Budget’s FY26 RE assumption of INR 357 trillion, the denominator effect mechanically widens the fiscal deficit to 4.5% of GDP from the budgeted 4.4%.

To preserve the FY27 deficit target of 4.3% of GDP, nominal expansion will need to either:

a) exceed the currently projected 10% YoY budgeted pace, moving closer to 13–14%; or

b) factor in a wider deficit assumption for FY27, around 0.2% of GDP higher than the targeted 4.3%.

The pace of consolidation now hinges more heavily on growth realisation than previously assumed. In addition, the starting point of central government debt in FY26 will be higher than previously assumed, implying a smaller improvement relative to the budgeted 55.6% of GDP in FY27.

Encouragingly, the rebased savings–investment ratio points to stronger underlying macro balances. The gross savings-to-GNDI ratio has risen sharply to 34.2% in FY26 from 29.3% in FY24, signalling improved domestic resource mobilisation. Meanwhile, the gross capital formation-to-GDP ratio remains elevated at 34.3% in FY25 versus 34.5% in FY24, suggesting that the growth impulse is increasingly being financed through domestic savings, thereby mitigating external vulnerability.

External Risks and Shifting Energy Dynamics

Prima facie, the revised GDP numbers highlight that India’s macro stability indicators, as well as the growth environment, remain conducive. Soft spots primarily stem from subdued equity portfolio flows, weak net FDI, and a depreciating rupee. While the economy has withstood recent geopolitical tensions, the nature of the Middle East hostilities has dented risk sentiment more materially.

To counter these risks, not only has the share of OPEC countries in the crude oil market declined compared with the past, but India’s own energy mix is now more diversified, with Russia as the top source and the US among the top five. Financial markets are nonetheless gripped by weak risk appetite and concerns over potential stoppages in oil and LPG supplies.

India’s direct trade with Iran has diminished sharply over the past 5–6 years due to US sanctions. However, six of the top ten suppliers of petroleum and crude oil to India are from the Middle East, accounting for more than half of total supply. Besides crude oil, Qatar, the largest supplier, and the UAE are important sources of LNG for the country. Supplies could be impacted after Qatar shut down its largest plant. LNG is not as strategic to domestic consumption as oil at present, making up less than a tenth of the energy mix, although dependence remains material for fertiliser production.

Policy Response and Potential Spillovers

The longevity and severity of the conflict will dictate the extent to which risk appetite weakens and high energy prices crimp demand. If hostilities end within a fortnight, as was the case in June 2025, markets are likely to recover swiftly. However, an escalation in the regional conflict or a blockade of the crucial Strait of Hormuz would carry wider macroeconomic ramifications.

India has undertaken reforms in its fuel sector by deregulating petrol and diesel prices, allowing alignment with market rates to reduce fiscal deficits and losses of upstream oil marketing companies. In the event of a sharp rise in global fuel prices, authorities are likely to be cautious about fully passing on higher costs to consumers. The need to protect household purchasing power, support businesses, and navigate a packed state election calendar in 1H26 may prompt a more measured approach to retail fuel price adjustments. A second-order impact would be on remittances, and consequently on the current account balance, if hostilities were to drag on for several months, which we view as a remote possibility for now.

(Radhika Rao, Executive Director & Senior Economist, DBS Bank.)

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