Stranger Things: India’s High Real GDP Hides More Than it Tells

When the July-September GDP reading came at 8.2% on Friday evening, it seemed that Indian economy has outdone any adverse impact of US tariffs and economy is performing strongly under the impact of GST cuts and personal income tax cuts. While there is no doubt that consumption has picked up significantly post the GST cuts and is likely to endure in rural sector significantly, one needs to look at the larger picture of how a high real GDP of 8% for April-September does not tie up with ground level economic fundamentals. 

First the real GDP number itself of July-September. A benign deflator of 0.5% and favorable base effect (the year ago was 5.6%) implies that with a nominal GDP of 8.7%, we are looking at 8.2%. But for a moment, can we look under the hood. How is the nominal doing. April-September nominal GDP is at 8.75% against last 10year annual average of nominal GDP of 10.5%. In fact, in October-December deflator is likely flat or even negative, we will have a real GDP print above nominal. So, if October-December nominal GDP comes at 7.5%, we are likely to see a real GDP no same at 7.5%. Same applies for full 2025-26. Nominal GDP for full 2025-26 is likely at 8% with real GDP at 7.5%. 

But how will nominal GDP fall in remainder of October-March. The full impact of 50% US tariffs will start reflecting from October as July-September saw much of the front loading of exports before the sanctions took place from end August. Add to it the fact that government spending is likely to slow at a decent pace as it tries to control fiscal deficit in light of the low tax collections. Lower net tax collections (hardly 6% so far in the fiscal year) against 11% show the real impact of a weak nominal GDP.

Also Read: The Quarter When Nominal Growth Became the Real Signal

So how will 2026-27 GDP numbers look like? Assuming a 7.5% real GDP for 2025-26, 2026-27 might see 6.5% real GDP and a nominal of 9.5%. Will that then be a cause of worry or a cause for joy?

The best way to answer above question is equity market FPI flows. Money flows where there are growth expectations. But for Indian equities, we have seen outflows of ₹1.4 trillion in the current calendar year so far. Indian rupee is at the bottom of emerging market currencies with -3.3% performance in this calendar year. And that too when crude is consistently below $65 levels. 

This is because corporate EBITDA levels are directly linked to nominal GDP with a differential of 100-200 bps across most emerging economies. For e.g. if the last 10 year average nominal GDP growth was 10.5%, corporate earnings growth was growing at 12-13%.  But now even with improving earnings across the breadth of market, why are FPIs still not returning to equities? The answer lies in the falling nominal GDP growth which tells us that we have a far lower inflation than our current productivity-growth dynamics demand. We look at productivity growth & current inflation profile below.

Also Read: The Blazing Growth Print India Simply Doesn’t Feel

India’s capital productivity (measured through incremental capital to output ratio i.e. ICOR) has improved in the post pandemic years. 4 units of capital are now needed to produce 1 unit of output (post pandemic) compared to 4.6 units of capital required on average between 2009-10 and 2018-19. But our core inflation ex precious metals has fallen to 2.6% from the pre pandemic average of 5%. An almost 50% reduction in core ex precious metals for a 15% improvement in IOCR. This is the real story of current growth inflation dynamics. Corporates have increased EBITDA margins due to lower input costs & digitisation/supply chain efficiencies but not passed on these benefits in the form of wages leading to sustained low real income for the formal/urban pool of employment. Hence household balance sheets are stretched and consumption demand was low before the GST cut gave some support. 

There is another issue with low nominal GDP growth which directly impacts the government. With low tax collections due to low nominal, fiscal deficit comes under strain and even maintaining the existing debt to GDP becomes unsustainable. Globally developed economies do reflate to improve their debt serviceability. Emerging economies unfortunately have been given sermons to focus on inflation.

When the MPC meets this week, they can easily bask in the glory of the recent high real GDP numbers or they can look through it to focus on what the GDP data hides rather then tells. The current low inflation profile is an opportunity to cut rates to a terminal of 5% over the next 6 months to reflate the economy back to 10-11% nominal GDP. What will also matter is the liquidity measures announcement for the remainder of October-March. With RBI forex forward book estimated at $70 billion in end Nov, Currency in circulation expected to pick up in January-March seasonally, markets expect ₹1.5 trillion-2.0 trillion  of front-loaded OMO announcements. If the nascent consumption uptick is to be preserved through credit offtake, banks need OMO more than a repo rate cut even perhaps.