Worries behind India’s robust GDP, inflation data

Why in the News

Six months into the West Asia war, India’s headline macroeconomic numbers have held up against the deterioration forecast for them. Gross Domestic Product (GDP) growth for the first quarter is put at 7 to 7.5 percent, retail inflation sits near the Reserve Bank of India (RBI) target of 4 percent, and the current account deficit is 0.3 percent of GDP. The forecasts had assumed the opposite, since the war was expected to raise crude oil prices and cut foreign investment, and El Nino conditions (a periodic warming of the eastern Pacific that shifts monsoon rainfall over India) threatened food production. The tension is that each of the three headline numbers rests on a support that can reverse within a quarter, so the resilience is a matter of composition rather than of structure.

Why were the macro numbers expected to deteriorate?

1. The war was expected to work through crude and capital: Higher crude oil prices and a reduction in foreign investment were the two channels analysts identified after the United States and Israel went to war with Iran.
2. Inflation was projected to triple: The rate was expected to rise from 2 percent in 2025-26 to near 6 percent, moving from the lower end of the RBI’s comfort zone to its upper limit.
3. The rupee carried the visible damage: The war exposed persistent weaknesses in the economy, expressed most sharply in the fall of the rupee’s exchange rate.
4. Household consumption was asked to adjust: The Prime Minister appealed to citizens to stop gold purchases and reduce fuel consumption, among other measures.

What is actually holding up the growth number?

1. Monetary easing has begun to transmit: The repo rate, the rate at which the RBI lends to commercial banks, was cut by 125 basis points between December 2024 and December 2025, and transmission into faster growth typically takes a couple of quarters.
2. Indirect tax cuts raised purchasing power: Cuts in the Goods and Services Tax in 2025 lowered prices and lifted economic activity.
3. Exports to the United States recovered: India’s exports rose as the tariffs imposed by the United States were removed.
4. Manufacturers produced ahead of demand: Firms front loaded production because they were anxious about future energy availability.
5. The estimates cluster above 7 percent: A research database of 100 growth indicators points to 7 to 7.5 percent for April, May and June, and one domestic bank’s research team projects 8 percent.

Why is headline inflation low, and what does the average conceal?

1. The headline rate is contained but rising: Monthly retail inflation has moved up since October and remains near the RBI’s 4 percent target level.
2. The restraint is not the usual kind: Inflation ordinarily stays muted because growth is muted, and here it has stayed muted despite supply pressures and with demand holding up.
3. Goods inflation is already at 5.4 percent: Food inflation and non food goods inflation together averaged 5.4 percent year on year in July.
4. Services inflation is doing the masking: Services inflation is at 2.5 percent, and a rise from that level, reflecting growth better, would push the headline number up quickly.

How is the current account deficit being held at 0.3 percent of GDP?

1. The current account measures net flows on trade: It is the net amount of money moving in or out of India as it trades goods and services with the world, and a country importing more than it exports runs a deficit on it.
2. The goods side is deteriorating: The goods trade deficit is growing, which is the normal consequence of fast growth and costlier imports.
3. Services and remittances are funding the gap: Rising services exports and remittances from Indians working abroad are offsetting the increase in the goods deficit.
4. The funding source is itself uncertain: Services exports have grown at a softer pace this year, and the effect of artificial intelligence on services export growth is unsettled.

What do the credit numbers signal beneath the growth rate?

1. Credit growth is partly guaranteed rather than commercial: A new government credit guarantee scheme for small firms accounts for part of the rise in loans.
2. Working capital demand reflects costlier inputs: Borrowing has risen because higher commodity prices have raised working capital needs.
3. Gold loan growth is a stress marker: The proliferation of gold loans functions as an indicator of household financial distress rather than of expansion.
4. Front loading borrows from the next quarter: Manufacturing brought forward can be followed by a lull, and agricultural growth can weaken if El Nino strengthens.

Challenges to sustaining India’s growth and inflation mix

1. Import dependence on crude oil transmits every external shock: India imports the large majority of the crude oil it consumes, so a price shock lands directly on the trade balance and on the fuel component of retail inflation. Eg. The 2022 crude price surge after the Ukraine war pushed retail inflation above the RBI’s 6 percent upper tolerance band for three consecutive quarters. Fix. Expand the strategic petroleum reserve and diversify long term crude contracts away from a single supplier region.
2. Exchange rate depreciation feeds imported inflation: A weaker rupee raises the domestic price of imported fuel, edible oil, fertiliser and electronics regardless of domestic demand conditions. Eg. Edible oil prices in India track palm oil import costs from Indonesia and Malaysia, where India buys the bulk of its supply. Fix. Deepen the domestic oilseed and fertiliser production base so that the depreciation pass through covers a smaller import basket.
3. Services led growth generates limited employment: The sector’s share of output far exceeds its share of jobs, so a growth rate driven by services does not translate into proportionate hiring. Eg. Information technology services contribute a large share of exports. They employ a small fraction of the non farm workforce. Fix. Tie production and export incentives to verified employment creation rather than to output or investment alone.
4. Private capital expenditure has not led the cycle: Growth supported by rate cuts, tax cuts and front loaded production rests on policy stimulus rather than on a durable investment upturn. Eg. Central government capital expenditure has carried the investment cycle since the pandemic, with private corporate investment recovering later and unevenly. Fix. Resolve land, contract enforcement and clearance delays that raise the fixed cost of a new private project.

Conclusion

The economy’s apparent stability is the arithmetic of one sector covering for the rest, and the sector doing the covering accounts for 55 percent of GDP. What to watch is whether services inflation rises and services exports weaken together, because that combination would force the RBI to raise interest rates and dampen the growth number the resilience narrative rests on.

Matching Previous Year Question

“[2021, GS3, 10 marks] Explain the difference between computing methodology of India’s Gross Domestic Product(GDP) before the year 2015 and after the year 2015.”