India’s Economy Might be Doing Well, But are its Citizens Better Off?

The latest quarterly GDP growth figure, a stronger-than-expected 7.8% in the April–June quarter, presents a striking narrative. It positions India as a resilient outlier, apparently weathering the impact of the conflict involving Iran, including oil supply shocks, fractured global supply chains, and surging energy costs that typically weigh heavily on energy-importing economies.

However, the headline figure should not be read solely as evidence of magical resilience, or a “herculean feat”, as Prime Minister Narendra Modi has described it. It also presents a structural puzzle that merits closer attention. Closer scrutiny of the data suggests that part of the surprise may lie in one of the most important parameters of national accounting: the GDP deflator.

Deflator Puzzle
According to the estimates released by the government on Monday, India’s nominal GDP grew 10.3% year on year in April–June, while real GDP growth was pegged at 7.8%, implying an implicit GDP deflator of about 2.3%. That figure is unusually low when set against several headline inflation measures, although those indices are not directly comparable with the economy-wide GDP deflator.

The Consumer Price Index-based inflation rate averaged around 4% during the quarter, while inflation rates based on the Wholesale Price Index and Producer Price Index were estimated at 9.4% and 9.1%, respectively. Household inflation expectations were higher still, reflecting the pressure many consumers perceived from food, energy, transport and other daily expenses. Expectations, however, measure sentiment and are not a substitute for the GDP deflator.

Some would argue that the inflation experienced by households during the quarter lay somewhere between the CPI and WPI readings, perhaps closer to the latter, given the rise in food, energy, transport and other everyday costs. While that perception cannot substitute for the GDP deflator, it raises the central question: would real GDP growth still have been as high as 7.8% had the deflator been materially higher than 2.5%?

The Inflation Disconnect

*Based on RBI survey data regarding household inflation expectations and sentiment.

How, then, is the gap between nominal and real GDP growth limited to about 2.3%?

Part of the explanation lies in the “double-deflation” method, under which input costs and output prices are adjusted separately. This can produce results that diverge sharply from CPI or WPI when input and output prices move differently.

Without fuller disclosure of sectoral deflators and weights, however, outside analysts cannot easily determine how much of the growth surprise reflects higher output and how much reflects the price adjustment. That is a case for greater transparency, failing which suspicion of cherry-picking will only gain more currency.

Data Limitations
Unlike annual GDP estimates, for which a much larger universe of data is available before the numbers are finalised, quarterly numbers use a smaller range of indicators, with limited scope for cross-referencing.

For instance, in parts of the quarterly estimation process, formal-sector performance may be used to infer activity in less-documented segments of the economy. If the informal sector performed more weakly, as some anecdotal evidence following the conflict suggests, that divergence may not be fully captured in the initial estimates.

Reports and anecdotal evidence suggest that, following the conflict involving Iran, some street vendors had to shut their businesses, many small and medium enterprises scaled down, fertiliser and ceramic plants operated below capacity for lack of gas, exporters with exposure to the Gulf region were hit, and transport and travel slowed.

These effects may have been localised, short-lived or offset by stronger activity elsewhere. Even so, their limited visibility in the aggregate numbers warrants closer examination.

One of the more puzzling numbers relates to manufacturing. According to the government, nominal manufacturing growth was 7.7%, lower than the 9.2% real growth rate for the sector. That implies a negative manufacturing GVA deflator, but not necessarily a broad fall in manufactured-goods prices. Under double deflation, such an outcome can also arise when input prices rise faster than output prices, compressing nominal value added.

Retail prices of automobiles, select consumer durables, electronic goods and certain other products may have dropped from the year-ago quarter because of GST rate cuts. But the aggregate result still calls for a clearer explanation of the price and margin dynamics within manufacturing. If it reflects broader price weakness, that would raise a separate concern about demand.

And there are concerns of shrinkflation, with companies selling smaller quantities at the same price, a common practice among FMCG companies when input costs rise and demand remains weak. This too points to strains that the aggregate data may not fully reveal.

Yet, Monday’s data show private final consumption expenditure growing a healthy 7.1% in the first quarter of this fiscal year, compared with 6.8% in the same quarter last year. What the number does not reveal, however, is how evenly this spending was distributed or how much may have been supported by borrowing.

Strong bank-credit growth can reflect economic expansion, but it can also arise from higher working-capital needs among firms facing cash-flow pressure. Household borrowing may similarly support consumption when income growth is weak. In other words, some indicators associated with stress can resemble signs of resilience when viewed in isolation.

Uneven Resilience
Several recent surveys, including those of the RBI, have shown weaker household sentiment regarding income and employment in rural and urban areas. Concerns over unemployment and subdued real wage growth suggest that the benefits of expansion may not be reaching households evenly.

Government tax collections have also reportedly trailed the pace required to meet fiscal targets. If that weakness persists, it could constrain social and development spending. The 4.3% growth in government consumption expenditure during April–June is consistent with a relatively restrained fiscal contribution, although it does not by itself establish that revenue weakness is forcing spending cuts.

These domestic concerns are compounded by external pressures manifested in a widening trade deficit, rupee weakness and pressure on the balance of payments. These risks do not negate the growth number, but they complicate the broader claim of resilience. To overlook them and rest the case on a single headline figure would invite policy error.

Policy Risk
The key risk associated with India’s reported economic trajectory is policy complacency. When headline figures are treated as evidence of exceptional success, authorities risk being blindsided by structural weaknesses. Continued reliance on fiscal or monetary support would also raise questions about how much of the momentum is self-sustaining, although the data presented here do not establish the extent of such support.

If subsequent revisions or fuller disclosures show that the 7.8% figure was materially boosted by an unusually low deflator, or that consumption gains were heavily concentrated among urban households, delayed course correction could deepen weaknesses in manufacturing, employment and rural wages.

Moving beyond headline celebration requires closer scrutiny and greater transparency in the data. Official figures will never mirror every household’s lived experience, but a persistent divergence between aggregate growth and household conditions deserves explanation.

India’s economy may well be doing strongly. The more important question is whether its gains are broad-based enough to improve the lives of most citizens.