Indian economy’s Mad Tea Party
Imagine a grand tea-party in a sprawling mansion, but the guests are not lords and ladies. Instead, they are economic indicators, policy pronouncements, market flows, and corporate boardroom whispers. The table is groaning under the weight of GDP growth numbers, stock valuations, inflation readings, rupee-dollar exchange rates, and investor sentiments, hopes, and desires. Yet somehow, between the teacups and scones, the house creaks. Something feels slightly off, though everyone behaves as if nothing is amiss.
This is the rabbit hole that India tumbles into every so often, an elaborate hall where optimism, anxiety, momentum, and fragility attend the same banquet. As observers of this odd spectacle, we are the bewildered wanderers trying to make sense of the contradictions balancing precariously on fine ‘China.’ The entry into the hall begins with a familiar slide. Global trade tensions, foreign capital outflows, and domestic cheerfulness swirl together like the spiral that draws the narrator, ChatGPT, who falls into Alice-like rabbit hole, and watches the economic contradictions pile up.
The AI tool puts GDP at the head of the table, flaunting its growth, and gleaming with medals and polished confidence. According to the official data, India’s real GDP expanded 8.2 per cent year-on-year in Q2 of FY 2025-26. The prime minister, finance ministers, and others applauded. Global commentators nodded approvingly. Investors abroad clinked teacups in recognition of one of the fastest-growing major economies. According to the narrator, GDP is the star guest, which is bright, composed, and certain of its standing and authority.
Yet, just across the table, sits the Index of Industrial Production (IIP). It looks rumpled, underdressed, and slightly embarrassed to be there. In October 2025, IIP grew 0.4 per cent year-on-year, a dramatic fall from 4.6 per cent in September. Electricity generation slowed. Mining activity contracted. Consumer durables continued shrinking, and even non-durables dipped. Capital-goods output managed only a timid 2-3 per cent improvement. The factories yawn, as the GDP claims at the party that it is booming.
This is the first contradiction of the evening. A nation proclaims exhilarating expansion, while its workshops clear their throats softly in protest. Historically, IIP and GDP have tended to move together. Studies over the decades show a statistically significant correlation between the two, suggesting that industrial activity has long been a meaningful driver of economic momentum. A widening gap between the GDP and IIP may therefore signal a structural shift away from industry, or simply the temporary distortions that sometimes colour monthly data. Do not forget that the GDP figures are for the July-September period, and IIP only for October. There is a lag.
Much of the recent GDP strength arises from services and consumption, which do not feed directly into the IIP. A consumption-led surge can lift GDP sharply without stimulating domestic industrial output, especially if spending tilts toward services, imported goods, or real estate. The decoupling may inflate headline growth, yet leave factory output trailing behind. However, the Q2 figures indicate that manufacturing grew by more than nine per cent, which is nothing to scoff at, or ignore. But this may be due to factories emptying out, and clearing their inventories.
Into this uneasy room wanders a weary figure: the Rupee. Its hat droops, and its expression is unmistakably tired of the festivities. Having slipped to Rs90 against the US dollar, a record low after months of decline, it sighs whenever someone mentions “strong fundamentals.” A widening trade deficit tugs at one sleeve, higher import bills at another, and persistent capital outflows weigh down its posture. The Rupee wonders how a party can celebrate so loudly when its own burdens grow heavier by the day. This is despite the massive help from the Reserve Bank of India to shore it up.
Across from the Rupee sits Consumption, dressed in bright colours, and speaking animatedly with guests. Economists point to data showing that private final consumption expenditure rose about 7.2 per cent in FY25, up from 5.6 per cent the previous year. Households appear to be spending more on retail, travel, fuel, services, and vehicles. Inflation remains manageable, food prices relatively calm, and disposable incomes somewhat buoyant. Consumption continues to refill its cup and to the narrator, seems convinced that the positive energy in the party room is real and sustainable.
At this moment, the mansion’s heavy doors swing open. The next set of guests does not walk in together. They move in opposite directions. The first group makes a U-turn, and hurries out quietly. It includes foreign portfolio investors, whispering about global risks, elevated yields in advanced markets, and geopolitical jitters. Their departure deepens the gloom on the face of the Rupee, as it watches through the large windows. Reports over the TV in the room confirm that foreign outflows have added considerable pressure to the currency.
The second group enters with calmer steps. Domestic retail investors do not announce their arrival, but their presence is steady and reassuring. They continue to channel money into mutual funds through SIPs. Although they cannot help the stock indices to move up, they stem the tide even as foreign investors leave. Market observers note that these domestic inflows have softened the impact of external turbulence and helped major indices maintain balance. It is ironic that when the indices begin to rise, as they did since October and November, retail investors turn sellers to book profits.
In a different wing of the mansion, a dazzling carnival unfolds. It is the IPO Wonderland, glowing with lights, and humming with excitement. Here, founders stand on small pedestals, telling stories that shimmer with promise. Investors line up in enthusiastic queues, elbowing forward for oversubscriptions. Merchant bankers move briskly from one issuer to another, gathering commitments as if distributing invitations to a royal celebration. The contrast is striking. A secondary market that nervously checks its pulse, and a primary market that appears incapable of anything but exuberance.
Inflation, normally the guest who consumes more than anyone else, is surprisingly restrained. Retail prices show multi-year lows, supported by stable food prices, and controlled overall price levels. For a moment, this seems like cause for celebration. But the calm is not absolute. Import-dependent goods misbehave. Perishables and eggs rise unexpectedly. These small but disruptive price spikes flicker in and out of the picture, much like the Cheshire Cat’s grin, visible for a moment, then vanishing without explanation. One is not even sure if there is a cat with a grin, or merely the grin.
