Copyright infringement not intended

Picture Courtesy: The Hindu

Context:

India’s GDP growth accelerated to 8.2% in Q2 FY26, the highest in six quarters. While the headline real growth appears robust, the nominal GDP growth of only 8.7% highlights deeper structural concerns.

Performance of Indian Economy in 2^nd Quarter:

Manufacturing Resurgence (9.1%): Aided by double-digit corporate profit growth, lower commodity prices, and productivity improvements. Boosted by low base effect (2.1%).

Services Sector Momentum (9.2%): Financial, real estate & professional services saw a nine-quarter high (10.2%). Public administration and defence expanded at 9.7%, even as central non-interest expenditure contracted.

Agriculture Slowdown (3.5%): Reflects monsoon variability, rural distress, and stagnating productivity. Reinforces concerns about rural demand recovery.

Why a nominal GDP slowdown is a core concern?

Nominal GDP reflects the economy’s value in monetary terms, combining both real activity and the prevailing price level. When nominal GDP grows slowly despite high real GDP numbers, it signals that prices in the economy are barely rising, or in some pockets, even stagnating.

Nominal GDP represents the economy’s financial strength: A slowing nominal GDP implies that the overall value of goods and services, when expressed in rupees, is not expanding rapidly.
These matters because:

• Government revenues (especially GST, income tax, corporate tax) respond mostly to nominal income and spending.
• Fiscal ratios like debt-to-GDP and deficit-to-GDP depend on the nominal GDP denominator. 

A very low GDP deflator points to deeper structural softness: The GDP deflator is the broadest measure of price changes in the economy. When the deflator is unusually low:

• It may indicate weakening demand, where firms are unable to raise prices for goods and services.
• It suggests limited cost pressures or profit-margin compression, especially in the informal and small-business segments.
• It may reflect disinflationary or deflationary tendencies in large parts of the production ecosystem, even if consumer-facing inflation appears high. 

Weak nominal growth suggests suppressed pricing power: In a healthy economy, rising incomes and robust demand allow firms to raise prices moderately.
When nominal GDP slows sharply:

• Firms may be discounting aggressively to sustain sales.
• Producers may face excess capacity, reducing their ability to pass on costs.
• Wage growth may stagnate, limiting consumption expansion.

This reflects an economy generating output without commensurate income growth, which is unsustainable for long-term development. 

Consumption and investment changes:

Private Consumption Gathers Pace

Private Final Consumption Expenditure (PFCE) expanded by 7.9%, improving from 7% in the previous quarter. This pick-up in consumption is linked to:

• Softer food prices
• GST rate adjustments that eased the tax burden
• Gradual moderation in borrowing costs
• Better rural purchasing power

Economists point out that lower inflation created room for households to spend more on non-essential items, strengthening the consumption-led recovery. 

Investment Activity Supported Mainly by Public Capex

Gross Fixed Capital Formation (GFCF) rose 7.3%, largely supported by:

• A sharp 31% increase in government capital spending
• Initial signs of private-sector investment returning
• Improved credit availability for industrial activity

However, analysts caution that private investment is still navigating global uncertainties, including elevated U.S. tariffs and external demand risks. 

What are the broader macroeconomic interpretations of India’s 2^nd Quarter growth?

Positive Signals:

Manufacturing and services are carrying the recovery: Manufacturing grew 9.1%, the highest in six quarters. Services expanded 9.2%, with financial and professional services touching 10.2%, the fastest in nine quarters. These two sectors account for ~75% of GDP and their strong performance indicate rising urban demand, corporate sector efficiency gains and support from government capex

Corporate Profitability Remains Robust: Listed companies recorded ~17–20% profit growth in Q2 (NSE-500 average). Operating margins improved due to lower input costs (metals, energy). High profitability supports steady tax collections (corporate tax is 28% of India’s gross tax revenue), reinvestment capacity and resilience to global shocks

Policy Stability Boosts Investment Climate: India’s macro framework focus on public capex, digital governance, tax reforms, and PLI schemes has created predictability for investors. Government capital expenditure rose 31% Year on Year. FDI approvals in PLI-linked sectors increased 9–10%. This stable policy environment underpins medium-term investment confidence. 

Negative Signals:

Weak Nominal GDP Signals Soft Demand: Nominal GDP grew only 8.7%, far below the budget assumption of 10.1%. GDP deflator is around 0.5%, not aligned with CPI inflation (~4–5% range). Nominal GDP drives tax revenues, fiscal deficit ratios, corporate turnover and wage and income valuations

Agriculture Slowdown & Rural Demand Stress: Agriculture grew only 3.5%, down from 4.1% last year. Rural wage growth is stagnant at ~1–2% real terms. Food inflation continues to hurt household budgets.

Private Investment Still Below Take-off Point: GFCF grew 7.3%, largely due to government capex, not private investment. Private capex announcements (CMIE data) remain 25% below pre-pandemic levels. Without strong private-sector investment, long-term growth may plateau around 6.5–7%, as capacity addition slows, job creation moderates, and innovation cycles weaken.

Conclusion:

India’s six-quarter-high GDP growth reflects genuine momentum in manufacturing, services and corporate performance, but the weak nominal GDP, rural stress, subdued private investment and data credibility concerns reveal underlying fragilities. Sustaining growth will depend on strengthening rural incomes, restoring private investment confidence, and improving statistical transparency so that headline expansion translates into broad-based and durable economic well-being. 

Source: The Hindu