Base-Year Syndrome in India’s Real GDP Growth

Despite global headwinds, India’s real GDP growth rose to 8.2% in the July–September quarter of 2025-26 from 7.8% in the April–June quarter and 5.6% in the same period last year. The low base effect and unusually low GDP deflator helped lift growth to a six-quarter high. In contrast, nominal GDP growth slipped to a four-quarter low of 8.7% in the July–September quarter. The gap between nominal and real GDP growth narrowed to a six-year low of 0.5% in the period.

The Indian economy, with 8% real GDP growth in the first half of 2025-26, is certainly not overheated. Similarly, very low retail inflation at 0.25% in October 2025 does not necessarily indicate weak demand. Growth in the July–September quarter was driven by high private final consumption expenditure of 7.9% and gross fixed capital formation of 7.3%, partly offset by a contraction in government final consumption expenditure of 2.7%. A deep dive into high GDP growth and low inflation, which together determine the GDP deflator, helps clarify the choices policymakers face for the future course of action.

Growth Story
India’s growth seems increasingly decoupled from the rest of the world. Global uncertainties, both geopolitical and geo-economic, have had only a limited impact on India’s post-pandemic momentum. Several factors explain this resilience. India’s growth has been largely  sustained by domestic consumption and investment. The savings deficit, reflected in the external current account balance, has narrowed steadily since 1991, with the current account deficit averaging around 1% of GDP in the last decade. Structural reforms pursued since the early 1990s, and more particularly over the past decade, have strengthened productivity.

Macroeconomic stability has been supported by consistent macroeconomic policies, while the expansion of physical and digital infrastructure has increased the economy’s flexibility. The widespread adoption of digital technology across economic activity has helped reduce production costs. With these foundations in place, India has the potential to remain the fastest-growing major economy for the next one to two decades.

India’s aspirational growth range is 8% to 8.5%, compared to the actual medium-term growth of about 6.5% between 2000-01 and 2024-25. Given current savings and investment levels and an incremental capital-output ratio of around 4.5, India can potentially grow at 7% to 7.5% in the medium term. To become a $30 trillion economy by 2047, India must lift its growth rate from an average of 6.5% to 8% to 8.5% over the next two decades. Real GDP growth of 8% in the April–September period of 2025-26 was encouraging. The key question is whether India has now reached the stage of aspirational growth.

Nominal GDP Growth
Nominal GDP growth tells a different story, giving rise to several ambiguities. First, it is not clear whether the economy is in an upswing or downswing of the business cycle, as nominal and real GDP growth have begun to move in opposite directions. Early signs of slowdown are already visible in the nine-month low manufacturing PMI for November 2025 at 56.6, and in the 14-month low industrial production growth for October at 0.4%.

Second, it is unclear how retail prices can remain so low in the fastest-growing major economy in the world.

Third, the deceleration in nominal GDP growth has already affected government final consumption expenditure and revenue collections in the July–September quarter of 2025-26. Despite festival demand, October GST collection was unimpressive due to rate rationalisation.

Fourth, given the commitment to fiscal consolidation, the government may compress public spending in the October–March period if revenue collections weaken further because of slower growth and GST rationalisation. Such a pullback could dampen demand in the second half of 2025-26.

Base-Year Syndrome
CPI inflation fell sharply, driven mainly by food price deflation since June 2025, reaching minus 5.02% in October 2025. For the July–September quarter, average CPI and WPI inflation stood at 1.7% and 0.07%, respectively. The GDP deflator, which broadly reflects 75% WPI and 25% CPI, declined markedly. The contribution of food deflation to the low deflator was pervasive, which in turn pushed real GDP growth well above expectations. High real GDP growth in the first half of 2025-26 appears more a statistical artefact than an underlying trend consistent with India’s long-term goal of becoming a developed economy.

The share of food and beverages in household expenditure has declined over time with rising per capita income. However, this shift has not been reflected in the CPI index, as the base year remains outdated. Had the CPI base been updated, the inflation trajectory would have looked different. The high weight of food and beverages in the CPI basket pulls headline inflation up more sharply when food inflation is elevated, resulting in a higher GDP deflator that dampens real GDP growth. Conversely, during food price deflation, the deflator turns low and exaggerates real GDP growth. The current GDP series, burdened by this base-year distortion, is increasingly seen as inaccurate. This risk is giving policymakers a false sense of complacency, potentially delaying policy action to the detriment of the wider economy.

The Way Forward 
The government is at an advanced stage of updating the base year for CPI, industrial production and GDP by February 2026, using data from the 2023-24 household consumer expenditure survey. This would remove the base-year distortion in the GDP series. As the weight of food and beverages is expected to fall, CPI inflation may be revised modestly higher in a deflationary environment. There is also a strong likelihood that real GDP growth will be revised lower following changes to the GDP deflator. Updating the base year should reduce some of the existing noise in the GDP series.

Ideally, real GDP growth should be invariant to a base-year change. The persistence of noise suggests the problem may lie elsewhere. The accuracy of GDP data depends on how input and output prices are deflated, a process known as double deflation, which is used by most developed countries when compiling GDP. India’s high real GDP growth may partly reflect a decline in input costs, yet in the absence of an input price index, this cannot be verified with confidence. Hopefully, the National Statistical Office will consider the deflation methodology while releasing GDP for the October–December quarter of 2025-26 under the new base.

* Views are personal.