Dear Readers, If you are observing the Indian economy from a distance, something doesn’t add up. On the one hand, official data show that India’s “real” GDP growth — that is, after removing the effect of inflation — has been surprising on the upside more often than not. The GDP is essentially the overall size of the Indian economy and is calculated by adding all the different types of expenditures by different entities in the country (individuals and companies, and governments, all). The GDP growth rate of 7.8% in the first quarter or Q1 (April, May and June) is a good case in point. It surprised everyone, including the policymakers, such as the RBI Governor, who said as much while announcing the latest monetary policy statement on Wednesday. To be sure, the 7.8% GDP growth in Q1 (data were released on August 29) is much higher than India’s long-term averages, be it over the past decade or even the past three decades. The incumbent government has said that India continues to remain the fastest-growing major economy in the world, even as most other big economies struggle to beat economic contraction. And yet, on the other hand, if one moves away from the days when GDP data are announced, most of the big policy moves over the past couple of years have essentially been about giving some tax relief or the other in a bid to boost overall demand and raise India’s consumption levels. First, in February 2023, in the year leading up to the General Election, the Union government raised the income tax exemption limit to Rs 7 lakhs per annum. Then, in February 2025, within a year of Prime Minister Narendra Modi coming back with a reduced mandate (the BJP lost 20% of its Lok Sabha seats in 2024), this exemption limit was raised to Rs 12 lakhs per annum. The income tax exemption limit in January 2019 was only Rs 2.5 lakhs pa, and the average annual income of an Indian in February 2025 was around Rs 2.3 lakh pa. Most recently, the Union government has — along with the state governments, which are also part of the GST Council — decided to cut GST rates as well. None of these formal tax cuts includes a whole host of election-time economic doles announced by all parties over the years. Why are these two trends odd, you may wonder. Because if the economy is growing fast and, in fact, so fast that the growth rate is repeatedly surprising even the policymakers and the markets, then there is no need to artificially boost overall demand and consumption. Keep in mind that, for most of the part since 2023, inflation has been a worry; it is only in the past few months that inflation has turned benign. Typically, when an economy grows at a fast pace, inflation is up because the overall supply of goods and services is unable to catch up with the high demand. Alternatively, when the demand in the economy is subdued, inflation cools down, and there is a need for policymakers to boost demand by means such as all kinds of tax cuts and interest rate cuts. On the face of it, in India, growth is running hot, and yet policymakers of all hues are trying to boost demand. Sample what Finance Minister Nirmala Sitharaman reportedly said as GST cuts were approved. “With GST rates coming down, consumption can go up. The more the demand, the companies which are selling these products will have to invest more and produce more. More production will lead to more jobs, which means the tax base will widen because more people will have income to buy things and pay taxes. That will lead to a foundation for even lesser taxes,” said Sitharaman in Calcutta. An alternative view What if one of the two trends is not really as robust as one might imagine? Of course, tax cuts are for real, and so are the government’s efforts to boost consumption and overall demand. So the obvious point of inquiry is the growth rate. Typically, and for good reason, one looks at the real GDP growth rate. But real GDP is a number that is derived or calculated after removing the effect of inflation from the nominal GDP growth, which, as it happens, is the data that is actually collected. The calculation of the real GDP growth rate has come under some cloud and questioning in the past few years. For those who want to read a detailed explainer on this issue, click here. The broader point is that many outside the government have claimed that the real GDP growth rate is overstating India’s economic momentum, while the government has claimed that detractors are trying to use the nominal GDP data in a bid to show weakness in India’s growth. Issues have been raised by certain sections with respect to the Indian GDP data. In this regard, with a view to bring clarity on issues raised w.r.t. the Indian GDP data, it is stated that: 1️⃣ India’s real GDP growth was 7.8% y/y (year on year) in Q1 FY24 (first Quarter of FY… — Ministry of Finance (@FinMinIndia) September 15, 2023 While looking at real GDP data is always the better thing to do when judging growth, it may be instructive to look at the trends of nominal GDP growth for at least four reasons. One, it is the actual observed variable and, to that extent, it is less susceptible to being questioned. Two, nominal GDP is the main benchmark for almost all the key economic variables in the country. For instance, tax collections are benchmarked to nominal GDP, as is the country's overall debt, the government's gross fiscal deficit or even the total market capitalisation of listed companies. Three, soon the process of the next Union Budget will start, and the nominal GDP and its growth rate will be the starting point for all calculations. So it makes sense to track how the nominal GDP growth rate is panning out and what it tells about the state of the economy. Fourth, the nominal GDP does capture the demand story of the economy better than the real GDP, which maps the supply story better. There is one more reason why nominal GDP data can be looked at: To compare the economic momentum to what it was before the Covid-19 pandemic. Economic data since April 2020 have suffered several statistical anomalies because of the extremes to which they were pushed first by the complete lockdowns during Covid-19 and then due to the sharp spike in inflation as a result of the Russia-Ukraine war. But in 2019-20, inflation was largely contained within policy range while the economy showed signs of a sharp slowdown. Readers may recall how 2019 was full of stories of rising car and two-wheeler inventories as consumption started slumping. And it was always a question where the Indian economy's growth momentum land once the Covid and Ukraine war impacts wear off. What the data shows TABLE 1 puts together the nominal GDP growth rates for the first quarter, going all the way back to 2012. The Q1 data were also instructive because they were the Q1 that got affected by the Covid-19 pandemic the most. The table shows year-on-year growth rates of nominal GDP as well as the three main components of GDP. 1> Expenditures made by Indians in their private capacity (technically called Private Final Consumption Expenditure or PFCE). This is the biggest engine of GDP growth in India, accounting for 55% to 60% of the GDP. 2> Expenditures made towards investments (both by private businesses as well as the government) into raising the productive capacity of the country. This is called Gross Fixed Capital Formation (GFCF), and this accounts for another 25%-30% of India’s GDP 3> Expenditures made by the government to run its daily affairs (excluding the investments such as roads). This accounts for the remaining 10% of GDP. The table also has a column that shows the growth rate in the total income of corporate India. Total income maps the overall size of the corporate economy and, as such, captures the demand story from another angle. The last column shows the nominal GDP growth rate for the full financial year in every concerned year. This gives a sense of how the Q1 GDP growth rate stood next to the full-year number. So what does that data show? Firstly, just for Q1 of the current year, it is clear that growth is being buoyed up by government expenditure, even as the two biggest engines of growth, accounting for almost 85%-90% of India’s GDP, grew at a rate lower than the overall growth rate. Expenditures by the government grew at 9.7% and without them growing as fast, the overall nominal growth rate would have been significantly lower. In other words, there seems to be a weakness in private consumption demand as well as private investment expenditures. Secondly, the deceleration in nominal growth rates, both for GDP as well as its two main components — private consumer demand and investment by businesses — is significant over the past two years. This may explain why, despite very strong real GDP growth rates, policymakers have been trying their best to boost consumption and investments. Thirdly, it is instructive to look at the data for Q1 in 2019. This was the quarter when India re-elected Modi with a resounding mandate. However, this was also the best quarter of that financial year (2019-20). The full year nominal GDP (at 6.4%) grew by a rate significantly lower than the Q1 growth. In real terms, the GDP growth had slumped to less than 4% in 2019-20 (this data is not in the table). Fourthly, the growth rates of total income in corporate India are quite in line with nominal GDP growth rates, as well as the notion (that even policymakers have) that India’s consumption continues to be a weak point. Without private consumption, it is hardly surprising that businesses have been holding back new investments. Upshot: While nominal GDP is not the best tool to compare long-term growth, primarily because inflation rates are significantly different and, as such, distort the picture, a look at this table does show the sharp slide in nominal GDP growth rates. It is not difficult to see why this would be a matter of worry for all policymakers: Nominal GDP growth rate sets the ceiling for economic growth in the country. Historically, back of the envelope calculations for India went something like this: 12% nominal GDP growth, 4% inflation, and, as a result, 8% real GDP growth rate. But if the nominal GDP growth rate starts to hover around 8% or 9%, it could quickly translate into a challenge for real GDP growth. That's because — barring exceptional times or statistical anomalies — unlike developed countries, India’s economy will likely continue to have an inflation rate closer to 4%, at least for the retail consumer. This explains why, despite publicly defending the strong real GDP growth rates, policymakers in India continue to act as if the economy is actually much weaker. Do you think India’s economic momentum is robust enough, or do you think it needs a continued push by the government? Share your views and queries at udit.misra@expressindia.com Take care, Udit
