Janus-faced Indian economy
We have a split economy. Well, let us call it a double-faced one. On the one hand, there is stupendous growth, almost eight per cent in the past two quarters. At the same time, the stock markets are stalling, with a year-to-date rise of seven per cent, with most of it happening since September, 2025. Consumer spending seems to have revived, with private consumption up in the second quarter. Yet, corporate earnings seem to be under pressure, at least across sectors. Just to add to the confusion, there are two sides to the GDP coin, one side being marked a huge plus, and other minus.
How is this possible? Either there is growth, or there is not. Either, the growth in the first half of this fiscal year was an unexpected eight per cent, or it was not. The trick, dear readers, lies in the way one looks at the coin. Some of us look at the heads, and feel good with the figures. Others look at tails, and feel dismal, or at least dismayed. The difference lies, just to use a bit of jargon, in the real and nominal GDP growth. Both are real, but only one of them is dubbed real.
India’s real economy deals with the figures that excited you in the past few days. It is about the 8.2 per cent, and 7.8 per cent, growth in the second and first quarter, respectively. It is about more than nine per cent growth in manufacturing, and more than 10 per cent in services. However, it is calculated after accounting for inflation. The rise in prices creates a skew in the sense that it gives a rosier picture if the inflation is high, and understates if the figure is in the negative. Real GDP figures adjust for these variations.
At the other end is what is called nominal growth, which includes inflation. It is obviously higher than the real growth when the price rise is positive, and lower when the opposite is true. Since the inflation figures in the recent past have come down quite dramatically, with food inflation in the negative, there is little difference between real and nominal growth figures. They differ by a margin of a per cent or two, or even lower. Compared to the 7.8 per cent and 8.2 per cent real growth in the past two quarters, the nominal growth was 8.8 per cent, and 8.7 per cent.
In effect, the nominal growth has fallen, even as the real one improved, thanks to lower inflation. As expected, the differences are minimal, one per cent and below. If one includes the January-March quarter in 2025, while the real growth was 7.4 per cent, the nominal one was 10.7 per cent, or a margin of more than three per cent. According to a media column, “In fact, nominal GDP has now clocked single-digit growth in five out of the last six quarters.” As we said, for most of us this does not matter much. It does for others.
For policy-makers, and firms the nominal growth is more important than the real one. As experts contend, lower nominal growth puts pressures on corporate costs, and prices, which are down. These obviously push down revenues, and profits. But this is not always the case. Given the cost and revenue structures, some firms will benefit, and others lose. If the pressures on revenues are higher than on costs, it will lower the profits, and vice versa. Hence, one needs to carefully figure out what is happening to corporate earnings. This puts into context why stock prices remain subdued.
Nominal growth is crucial for the policy-makers, especially the finance minister. Key Budget targets, like the fiscal deficit, are based on percentages of nominal growth. If the latter is down, the deficit can exceed targets and estimates. “In absolute terms, nominal GDP has shrunk during the (second) quarter, and hence the numerator, that is, the deficit percentage, automatically gets bigger, putting the Government’s Budget targets under strain,” states a media column. This may explain the finance ministry’s urge, and hope, that private investments will surge, and help to reduce public spending. This is one of the ways to reduce expenditure, and keep a check on deficit.
Tax collections depend on nominal growth. There may or may not be a direct cause-and-effect, but there is a correlation. Lower nominal growth can depress tax revenues. In the recent past, net taxes rose by nine per cent, which mirrors the nominal growth numbers. As we mentioned earlier, the low nominal growth puts pressure on official expenditure. Combined with the downward push on official revenues, it can squeeze the Government’s finances from both ends. This will make it more difficult for the finance minister to manage the fiscal deficit. In terms of numbers, the next Budget will be crucial.
The easy way out for the finance minister is to assume higher nominal growth over the remaining two quarters of this fiscal year, as well as in 2026-27. This will boost the revenues, and expenditure can go on as assumed. It is easy as the GDP figures for the third quarter are unlikely to come in before the Budget, given that there is a lag of almost two months, or six-to-eight weeks. The next set of numbers will come in middle or late February 2026. The finance minister can re-juggle the figures later, when she presents the Budget in 2027.
However, as we mentioned in our earlier columns, both the business community, and policy-makers need to be careful. The rational exuberance about growth need not push them to take more risks, or understate risks, at least when they envisage their strategy and numbers. One will get a handle on the policy-makers’ mindset when the Reserve Bank of India (RBI) decides on an interest rate cut at its next policy meeting in a few days. There are pressures to cut the rate, given the high GDP growth, but the RBI, as one columnist puts it, needs to ask “why, rather than how much and when.”
Firms cannot assume higher demand, which may happen if the positive impact of GST 2.0 continues. They will need to look carefully at the changing cost structures, and revenue growths over the next 1-2 quarters. They cannot blindly invest, and hike capacities. If they do, some of them will make mistakes, and a few will blunder. Some of them will emerge as winners. But the impact will not be uniform. This is a lesson for investors too. Future earnings will not be secular.
