The Quarter When Nominal Growth Became the Real Signal

India’s July–September GDP release will be remembered less for its 8.2% real growth than for the unusual configuration that produced it. Nominal gross domestic product grew 8.7%, leaving barely half a percentage point between the two measures. In an economy that appears robust across manufacturing, services and investment, this narrowness is more than a statistical curiosity. It reflects a deflator that has collapsed to 0.5%, compressing the value of output even as volumes rise, and it carries deeper implications for how growth should be interpreted.

This soft deflator is doing much of the heavy lifting. Subdued wholesale prices, weaker inflation in manufactured goods and services, and the fading of earlier commodity pressures have all fed into the GDP price index.

The wholesale price index hovered close to zero through the quarter, and that weakness spilled directly into the nominal aggregates. Output volumes have advanced, but the cash value generated per unit of activity has not kept pace, a divergence that shapes the quality of the expansion far more than headline real GDP suggests.

A more consequential wrinkle lies beneath these aggregates.

The quarter saw very sharp statistical discrepancies: 4.1 percentage points of the 8.2% headline GDP came from the residual gap between the production and expenditure approaches, according to economists at HDFC Bank. Almost half of the reported growth, therefore, cannot be attributed to consumption, investment, government spending or trade flows. This emerges as a balancing item required to reconcile two different measurement frames, and such large residuals typically compress sharply upon revision. Until that happens, any reading of demand strength is necessarily tentative, because the expenditure components themselves may be overstated relative to what businesses actually produced or earned.

The sectoral pattern reflects the same distortion. Manufacturing grew 9.1%, but the impulse was flattered by one-off drivers: frontloaded shipments to the United States ahead of tariff actions, festive-season production ahead of the GST rate reductions, and easier liquidity conditions following recent rate cuts. These are transitory supports, not evidence of a structural upturn. Contact-intensive services show a similar dissonance. Real growth came in at 7.4%, yet high-frequency markers—air-passenger numbers, cargo volumes, toll collections—were far softer. Exceptionally low deflators in these segments lifted the real growth above the nominal, exaggerating the appearance of underlying strength.

Investment grew 7.3% year on year, but the momentum is significantly government-led. Central capital expenditure surged almost 31% in the second quarter of the year. This frontloading will inevitably moderate as fiscal constraints tighten. Private capital formation remains steady but not broad-based. Consumption presents a similar duality: rural demand is improving, while urban momentum remains uneven and is closely tied to labour-market conditions that have yet to display sustained strengthening.

This backdrop makes nominal growth the more revealing signal. Firms experience the economy through turnover rather than inflation-adjusted volume indices. When nominal growth is muted, pricing power remains limited, margins rely on operating efficiencies rather than value accretion, and investment decisions become more cautious. Income growth, tax flows and wage expansion are all anchored in nominal dynamics, not real ones – tax collections grew a paltry 1.4% during the quarter. A phase in which real output races ahead while nominal income barely moves is unlikely to persist without consequences.

For policymakers, the duality is even sharper. Real growth of 8.2% signals buoyant activity, but nominal growth of 8.7% signals weak pricing and softer income momentum.

The contrast gives the Reserve Bank two conflicting readings of the cycle. If nominal conditions are judged the more accurate indicator of underlying economic health, especially given the outsized discrepancy and the inflation-suppressed deflator, a minor adjustment remains possible. If real strength is viewed as the more reliable signal once revisions smooth out the data, patience may prevail.

Either way, the July–September numbers make one point unmistakable. The volume of activity and the value it generates have diverged meaningfully. The coming quarters will determine whether the gap closes through firmer prices or through slower real growth. But for now, the nominal side of the ledger is telling the clearer story.