India's Economic Paradox: Strong Growth Meets Fiscal Challenges
India's economy presents a fascinating contradiction in the second quarter of the current fiscal year. While real GDP growth has accelerated to an impressive 8.2 percent, following 7.8 percent in the first quarter, the nominal economy tells a different story. This economic dichotomy has left analysts grappling with whether the Indian economy is booming or slowing down.
Sectoral Performance and Growth Drivers
The standout performers driving this growth have been manufacturing and services, both recording a substantial jump of approximately 9 percent. However, this stellar performance comes with important caveats. The growth has been supported by multiple temporary factors including a low base effect, sub-one percent deflator, frontloading of export orders to avoid US tariffs, and stockpiling for the festive season combined with GST rate cuts.
On the expenditure side, private consumption showed remarkable strength, jumping by 90 basis points compared to the previous quarter. This consumer spending surge has been strongly supported by both fiscal and monetary measures implemented by the government and the Reserve Bank of India. Investment activity, while remaining robust, showed some moderation with a slight slowdown during the quarter.
The Nominal GDP Conundrum
The real story emerges when examining nominal GDP figures, which account for inflation. The nominal economy has continued its slowing trend from 10.7 percent in March to 8.8 percent in June and further down to 8.7 percent in the September quarter. This contrasts sharply with the real GDP growth trajectory of 7.4, 7.8 and 8.2 percent during the same periods.
This divergence creates a significant challenge for fiscal management. As Sachchidanand Shukla, Group Chief Economist at L&T, explains, nominal GDP has now clocked single-digit growth in five out of the last six quarters. The FY26 budgetary assumption was based on 10.1 percent nominal growth, and the shrinking nominal GDP in absolute terms automatically increases the fiscal deficit percentage, putting the government's budget targets under considerable strain.
Future Outlook and Key Uncertainties
Looking ahead, three critical factors will shape India's economic trajectory. First, the sustainability of stimulus from GST rate cuts remains uncertain - whether this was a one-time boost or will continue to support consumption. Second, the continuing impact of US tariffs poses significant risks, with potential deeper effects on jobs and output if they persist. Third, data uncertainty looms as India prepares for major dataset revisions in early 2026, including GDP and CPI base year revisions in February and a revamped IIP series in May.
With the economy achieving 8.8 percent growth in the first half of the year, the asking rate for the second half drops to just 5.7 percent based on RBI's revised projection of 6.8 percent for the full year. This raises questions about monetary policy direction, especially with Reserve Bank of India Governor Sanjay Malhotra indicating scope for further rate cuts despite the strong growth numbers and near-zero inflation.
