India’s 8.2% GDP growth: Why the headline looks strong, but the economy feels weaker

India’s 8.2% real GDP growth in July–September 2025 has placed it at the top of the global growth league, at a time when demand is slowing worldwide, supply chains remain fractured, and US tariffs are rising. On the surface, the number signals exceptional resilience. Beneath it, however, lie worrying signals — collapsing nominal growth, unusually low deflators, and widening disconnects between official output data, corporate performance and tax collections. The challenge for policymakers is to look past the applause and confront what the numbers are really saying.

The hidden weakness: Why nominal growth matters more than it seems

Over three consecutive quarters, real GDP growth has climbed from 7.4% to 7.8% to 8.2%. Yet nominal GDP growth has moved in the opposite direction. The reason is the sharp fall in the implicit GDP deflator — from 3.7% to just 0.5%.

For a developing economy like India, this convergence of real and nominal growth is rare and unsettling. Economic decisions are made in nominal terms: firms earn nominal revenues, workers are paid nominal wages, and governments collect nominal taxes. When nominal growth weakens, corporate earnings disappoint, tax collections underperform, and fiscal pressures build automatically. The early signs are visible: net tax growth in the first half of FY26, at about 9%, is already below Budget assumptions.

When strong GVA growth looks ‘optical’

Manufacturing and services gross value added (GVA) expanded by nearly 9% in the quarter. But this strength appears partly optical rather than real. Physical output, measured by the Index of Industrial Production, rose only 4.8%.

Several factors inflated headline GVA: favourable base effects, sharply lower deflators, front-loading of export orders ahead of tariff deadlines, GST rate cuts, and festival-driven inventory build-up. Together, these can make growth look stronger on paper than on the factory floor.

On the demand side, private consumption rose by about 90 basis points, supported by fiscal transfers, easier monetary conditions, GST cuts and festive spending. Investment remained positive but showed early signs of slowing. India is not in a demand recession — but the growth impulse is increasingly consumption-heavy and investment-light.

What high-frequency data is quietly signalling

According to the National Statistical Office’s press note, 12 of 22 high-frequency indicators slowed in Q2 FY26 compared to Q1. Of 18 physical-quantity measures, only three — steel, cement and commercial vehicles — grew faster than 6%.

Even more telling, “core” GDP growth (excluding statistical discrepancies) fell to about 4.1% in Q2. This suggests that a significant portion of headline acceleration may be driven by deflator compression and accounting adjustments, not broad-based economic momentum.

The outlook for FY26: Three risks policymakers cannot ignore

As the year unfolds, the debate must shift from celebration to diagnosis.

First, the consumption question. Was the recent surge a durable rise in demand, or largely front-loaded festive buying amplified by GST cuts? If it is the latter, retail sales and factory orders could soften once inventories normalise. Manufacturing PMI has already slipped to 56.6 in November 2025, its weakest in nine months.

Second, the trade drag. Higher US tariffs on Indian exports come atop a fragile global environment. Persistent trade barriers or fresh supply-chain shocks would hit export volumes, delay private investment, and dampen hiring — especially in export-oriented states and manufacturing clusters.

Third, the data risk. India will revise GDP and CPI base years in February 2026 and introduce a revamped Index of Industrial Production in May 2026. Past revisions have materially altered growth trajectories. At a time when deflators are already distorting the real–nominal relationship, these changes could force markets and policymakers to reassess risks mid-cycle.

The policy bind: Why standard tools offer limited relief

The Reserve Bank of India projects second-half FY26 growth at 5.7%, pulling full-year growth to about 6.8%. The deeper dilemma, however, is structural. High real growth, inflation near target, and weak nominal expansion is an unusual mix.

Rate cuts alone cannot fix weak nominal revenues driven by collapsing deflators. Liquidity is ample, but private investment is constrained less by cost of capital than by regulatory uncertainty, demand visibility and policy clarity. On the fiscal side, the arithmetic is unforgiving: without a growth or tax-efficiency upside, the government faces hard trade-offs between boosting public investment, sustaining welfare schemes, and meeting deficit targets.

Why composition matters more than the headline

Even after adjusting for deflator-driven overstatement, India is growing faster than most large economies. Private consumption has some support from easing inflation and tentative rural recovery. But the composition of growth is changing.

Exports are underperforming, private investment remains subdued, and consumption is doing the heavy lifting. This mix can deliver respectable growth for a few years, but it is unlikely to sustain the long expansion needed to absorb an estimated eight million new workers entering the labour force annually.

What a more durable growth strategy requires

First, reviving private investment. Private capex has slipped to about 11.2% of GDP, contributing just a third of gross fixed capital formation — a decade low. The focus must shift from broad incentives to targeted de-risking: regulatory clarity, faster execution, and nurturing industrial ecosystems.

Second, rebuilding export momentum. With India’s share of global trade still modest, deeper integration into global value chains is achievable. Predictable trade policy, better logistics, reliable power and firm-level competitiveness are critical if exports are to grow faster than the current mid-single-digit pace.

Third, modernising statistical systems. In an era of intense data scrutiny, credible deflators, updated base years and accurate sectoral coverage are policy assets, not technical footnotes.

From sprint to marathon

India’s 8.2% growth deserves recognition — but not complacency. The real test is whether today’s sprint can be converted into a marathon. That will depend less on consumption spikes and more on the unglamorous work of reviving private investment, strengthening exports and ensuring that the numbers guiding policy genuinely reflect economic reality.