Why in the News?

India’s GDP grew 8.2% in Q2 of FY 2025-26 (July–September), marking a six-quarter high, supported mainly by manufacturing and services.
However, economists flagged concerns over low nominal GDP growth (8.7%), which signals subdued economic activity and potential stress on fiscal targets.

Key Data

• Real GDP growth (Q2 FY26): 8.2%
• Real GDP growth (Q1 FY26): 7.8%
• Growth in H1 FY26: 8%
• Nominal GDP growth: 8.7% (vs Budget assumption of 10.1%)
• Last higher GDP growth: Q4 FY24
• Government revised full-year growth forecast: “7% or higher”

Why High Real but Low Nominal Growth?

• Nominal GDP = Real GDP + Inflation (GDP deflator)
• A very low deflator (~0.5%) boosted real growth artificially
• Indicates inflation in tradable/manufactured goods is low, not necessarily high economic momentum
• Low nominal growth → Lower tax revenues, harder to meet fiscal deficit target of 4.4%

Sector-wise Performance

1. Manufacturing

• Growth: 9.1% (six-quarter high)
• Reasons:
  • Corporate earnings showed strong growth
  • Low base effect (growth was only 2.1% last year)

2. Services

• Growth: 9.2%
• Within services:
  • Financial, real estate, professional services: 10.2% (nine-quarter high)
  • Public admin, defence & other services: 9.7%

3. Agriculture

• 3.5% (lower than 4.1% last year)
• Slight moderation due to uneven monsoon patterns

Fiscal Concerns

• Nominal GDP shortfall may:
  • Reduce tax buoyancy
  • Pressure fiscal deficit (target: 4.4%)
  • Lower denominator for deficit calculation
• Lower capital expenditure visible (“no upswing in GFCF”)

Opposition Criticism

• IMF recently rated India’s national accounts ‘C’, the second-lowest grade
  • Claims real GDP inflated using unrealistically low deflator
  • Points to weak private investment and thin capital formation

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