India's Economy: Growth and Slowdown Unraveled
The Indian economy is currently presenting a dual narrative: it is both thriving and slowing down simultaneously. Real GDP growth has impressively reached 8.2% in the second quarter of the fiscal year, coming on the heels of a 7.8% growth in the first quarter. This growth is particularly noteworthy considering the external pressures from US tariffs and significant geopolitical uncertainties. It has left many economists and forecasters reassessing their predictions.
The robust performance can be attributed to a strong jump in the manufacturing and services sectors, which surged by around 9%. However, this growth must be viewed in context, as it stems partly from a low base effect, a sub-one percent deflator, and preemptive stockpiling for the festive season, alongside GST rate cuts. Private consumption also saw a notable increase, bolstered by supportive fiscal and monetary measures. Yet, investment growth has shown signs of slowing.
In absolute terms, the nominal GDP has been declining, moving from 10.7% in March to 8.8% in June, and now to 8.7% in the September quarter. This contrasts with the real GDP growth figures that show an upward trend. While the real economy is flourishing, the nominal economy is grappling with challenges, mainly due to falling inflation rates. This has led to a trend of single-digit nominal GDP growth over the last six quarters, raising concerns about overall economic health.
The implications of low nominal growth are significant. It can mean lower costs and prices, but it may also lead to weakened revenues for businesses and the government. Some companies with pricing power might thrive, while others could face declining revenues and profit margins. This scenario puts pressure on the government's budget targets, especially as nominal GDP shrinkage complicates fiscal deficit measurements.
Looking ahead, the economic outlook remains uncertain. Factors such as the sustainability of GST rate cuts, the duration of US tariffs, and upcoming data revisions in early 2026 will play critical roles in shaping the economy. With a stellar GDP growth rate of 8.8% in the first half of the year, the growth target for the latter half is set at 5.7%, as projected by the RBI.
In conclusion, the Reserve Bank of India has room for another rate cut, but with growth exceeding 8% and inflation at near-zero levels, the focus shifts from how much to cut to the rationale behind further cuts. The economic landscape is complex, and stakeholders must navigate these waters cautiously.
