Does it matter if India’s trends of nominal and real GDP growth diverge?

Then the Reserve Bank of India (RBI) cut interest rates by 50 basis points in June, following cuts of 25 basis points each in February and April—a total of a percentage point.

Retail inflation, measured by India’s consumer price index (CPI), decelerated to just 1.7% as an average of three months’ on-year monthly readings till September, marking the lowest level in any rolling quarterly period since the current series began in 2012.

Most recently, the government announced a significant reduction in GST rates across categories and simplified the structure of this tax regime.

There are some concerns as well. Bank credit growth has been stuck at around 10% for a few months, industrial production growth was subdued at 2.8% in April-August, and direct tax receipts (personal plus corporate) were down 2.2% from a year earlier up to August.

US President Donald Trump and his administration have penalized India with an excessive tariff rate for buying Russian crude oil. This has pushed the Indian rupee to its all-time weakest level of around 89 to the dollar.

Amid all these developments, India’s rate of real GDP growth posted a five-quarter high of 7.8% from a year earlier in the first quarter of 2025-26, beating all expectations by a good margin. RBI projects it at 7% in the second quarter.

At the same time, nominal GDP growth was only 8.8% from a year earlier in the first quarter, compared to 10.1% budgeted by the government for this fiscal year. Though RBI doesn’t offer nominal GDP growth projections, we expect it to weaken to 8-8.5% in the second quarter.

The economy’s big questions: What should we look at—nominal or real? What is more relevant?

Also, what explains this diverging growth trend—one improving, the other worsening—between nominal and real GDP?

More importantly, what’s likely to happen in subsequent quarters?

If one is looking at economic growth or cross-country growth comparisons, then real data matters. But if we want to compare the size of the economy, nominal GDP (in dollar terms) is more relevant.

Further, while purchasing power is reflected by real numbers, the majority of data collected for GDP estimation in India is on a nominal basis (which is then ‘deflated’ to arrive at real figures).

Direct tax collections, GST receipts, exports and imports, corporate earnings and bank credit are some of the key metrics used to gauge economic trends, and all of these are available in nominal terms.

About 40-45% of India’s real GDP estimation is based on nominal data, since many components of gross value added (GVA)—such as manufacturing, trade and repair services, hotels and restaurants, real estate, dwelling and professional services, financial services and others—are available only in nominal terms.

Moreover, all our macro ratios—savings-to-GDP, fiscal deficit-to-GDP, current account balance-to-GDP and investment-to-GDP—use nominal GDP in the denominator. In other words, nominal figures are very important for macroeconomic management.

Role of the GDP deflator: If weaker nominal GDP growth has not been reflected in real growth, it is because the GDP deflator used for the former’s statistical conversion to real data has been very low.

The deflator was only 0.9% in the first quarter of 2025-26, and we expect it to be only about 0.6% in the second.

Our estimates suggest that the GDP deflator for the whole fiscal year could be about 1.4%, marking the lowest level in half a century. This is what explains the divergence in trends between nominal and real GDP growth.

The GDP deflator is arrived at by using a combination of wholesale price index (WPI) and CPI. These two measures of inflation are roughly used in the ratio of 2:1 in the GVA deflator and it’s slightly more skewed towards CPI in the GDP deflator.

Both wholesale and retail measures of inflation have been very weak this year. In the first five months of 2025-26 (April-August 2025), WPI inflation averaged 0.1% in 1HFY26 (versus 2.1% in the corresponding period last year), while CPI inflation averaged 2.2% (versus 4.6%).

We expect WPI inflation to average 0.8% and CPI inflation at 2.3% (2.6% is RBI’s forecast) in 2025-26. India’s inflation, whichever way one looks at, is very low. This reflects subdued prices of imported goods (which make up about 40% of the WPI) and weak domestic demand.

For India’s GDP deflator, the previous low was 2.3% in 2015-16, when real GDP growth was at a five-year high of 8%, accompanied by an 11-year low of 10.5% for nominal GDP growth.

Since real GDP growth is likely to be much better (about 8%) in the first half of 2025-26, it will take the entire fiscal year’s real growth towards 7%, with about 6% year-on-year growth in the second half.

A clear perspective: India’s strong real growth can be attributed largely to statistical effects, as nominal GDP growth is likely to stay at 8-8.5% over the next three quarters, averaging 8.4% for the full year.

In fact, our forecasts suggest that nominal GDP growth could stay under 10% for the third successive year in 2026-27.

This could have varied implications—tax receipts may remain weak, restricting the government’s ability to support the real economy; the sales growth of companies could stay subdued, although profits may show better growth; and bank credit growth may also hover around low double-digit levels at best.

Overall, thus, the economy does not seem to be in great shape. With such low levels of inflation and nominal growth, we should perhaps look through a half-percentage-point improvement in real GDP growth towards 7% in 2025-26 from 6.5% in 2024-25.

We expect real growth to slow to around 6% in 2026-27, as the deflator normalizes somewhat (to a level of around 3%), although nominal growth may improve. Accordingly, we expect RBI to cut policy rates in December (and probably again in February).

However, since monetary policy has its limits as a growth spur, 2026-27 could turn out to be another forgettable year, given the economy’s need to attain and sustain a higher pace.

The author is an India Economist, executive director at CLSA India, and author of ‘The Eight Per Cent Solution’.