New formula pushes up GDP

As India issued GDP figures based on a new improved formula to calculate GDP growth, experts were correct in the assumption that it would hike the estimate for this year (2025-26), and make a similar upwards adjustment to the future figures. The real GDP (minus inflation) is estimated to grow at a higher 7.6 per cent, and the growth was 7.8 per cent in the third quarter (October-December 2025). In 2025-26, while manufacturing will grow by a robust, and almost-unbelievable double digit, services such as trade, repair, hotels, transport, communication, and storage will record a cumulative nine per cent.

However, there are a few hiccups. Agriculture and allied sectors, which are the mainstay of the poor, will witness the lowest growth (2.4 per cent) of gross value-added in the past three fiscal years. The figure was 4.2 per cent in 2024-25, which along with more than nine per cent growth in manufacturing, and an encouraging one in services boosted the overall figure to over seven per cent. Mining is another laggard this fiscal, with growth plummeting from nearer to 12 per cent in the last fiscal to an expected just above four per cent in 2025-26.

Similar is the case with the utilities such as electricity, gas, and water, whose growth rate in 2025-26 will be a mere 1.5 per cent compared to 10.7 per cent in 2023-24, and 2.9 per cent in 2024-25. Construction, which generates the maximum employment in the country, may be down, from 9.9 per cent in 2023-24, and 7.3 per cent in 2024-25 to 7.1 per cent in 2025-26. Most segments in the services sector seem to still be on a high, as mentioned earlier. Even the gross value-added growth in finance, real estate, and housing combined will be nearly the same in 2025-26, compared to the revised estimates for the previous year.

There are two reasons for the optimism, and higher expectations. One, the new calculation includes data that is relevant today. GST collections, improved figures from multi-activity firms, and improved coverage of the informal sector through annual surveys are some of the changes. These allow the figures to become more dynamic, and truly reflect the ground realities, rather than include assumptions and logical rationale. Earlier, the growth for the informal sector was estimated to be the same as the formal one, without quantitative or qualitative inputs.

Two, the older calculation was archaic and outdated. The new series, according to an official press release, includes “updated rates and ratios… drawn from various surveys, as well as from methodological studies… in collaboration with various expert institutions.” More important is the adoption of what is called the ‘double deflation’ in agriculture and manufacturing. This was one of the fiercest criticisms against the old calculation, which was voiced by critics, economists, and global agencies like the International Monetary Fund. This correction makes the data more effective, efficient, and transparent.

When one looks at segment-wise data within manufacturing, there are a few GST-related surprises, some of which were expected after the tax cuts in September 2025 but not to this extent. For example, the sales of three-wheelers in the third quarter of 2025-26 jumped by 14 per cent, much higher than less than 10 per cent in the second, a measly 0.1 per cent in the first. The registrations of passenger cars shot up to 20 per cent in the third quarter, compared to a dismal and negative 1.2 per cent in the second, and a lower eight per cent in the first.

Transportation seemed to be at a peak. Sales of commercial vehicles were up 21.5 per cent in the third quarter, compared to a negative 0.6 per cent in the first. Outward air passenger and cargo by up by nearly 15 per cent in the third quarter compared to 3.7 per cent in the second. Cargo handled at major ports grew by more than 13 per cent in the third quarter compared to less than six per cent each in the first two. Railways too did well with a passenger growth of 13 per cent in the third quarter compared to 1.2 per cent in the second.

However, one needs to add a few caveats to optimism. The first is that this is the first time that annual surveys about the informal sector were included in the calculation. This may imply that the data may not be perfect, and will need to be finetuned. Since the earlier practice was to equate it with the formal sector, there was a mismatch. Many experts believe that after GST, demonetisation, and the pandemic, the informal sector has either been hurt, or assimilated with the formal one. This adverse impact may not be fully included in the new series.

Second, over the past few years, a twin-paradox afflicts manufacturing. In a bid to show consistent quarterly results, and please the shareholders, especially the institutional ones, firms routinely push products into the wholesale and retail sectors. This enables them to show higher sales, and reduces inventories, but piles the goods up at the selling ends. This possibly results in higher GST collections, since it is paid on the invoices, and not on sales. These skew the growth numbers. This is especially true for segments such as passenger and commercial vehicles, including two-wheelers, white goods, and home appliances.

Over the past few years, officials have regularly claimed huge frauds, mismatches, and manipulations in the GST regime. Fraudulent refunds have reached lakhs of crores of rupees. In the recent past, the officials uncovered huge scams, each running into thousands of crores of rupees. Many experts feel that this pushes up the growth numbers, as the fraud sales invoices to claim refunds on input tax credit, or GST paid on inputs, reflect higher-than-actual sales. While GST was not prominent in the earlier growth calculation, it is an important and integral component now, and may skew the figures towards the higher end.

But to be fair to the Government, there is a positive caveat. Measures to combat corruption have indeed forced many to deal in white money, and legal deals. Even in real estate and construction, which are the largest generators of black money, buyers and sellers, or vendors and clients insist on legitimate payments, rather than a high percentage in cash. This has pushed the unaccounted component of the economy to be measured, and reflected in the GDP figures. Obviously, this pushes up the GDP, and may be one of the invisible explainers for higher-than-expected growths in the recent past, including the current fiscal.