Wednesday, 14 Jan, 2026
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Nominal GDP underpins tax revenue, debt sustainability, and corporate earnings. In Q1, the gap with real growth widened, highlighting risks for an economy that must fund rising public investment, cut deficits, and attract private capital
The growth math in the first half of FY26 highlights a widening contradiction: the economy is posting strong real growth even as the nominal picture weakens. In Q1FY26, nominal GDP growth slowed to 8.8% from 10.8% in the previous quarter. Yet real GDP growth inched up to 7.8% from 7.4% in Q4FY25.
The statistical reason is simple—deflators have fallen sharply as inflation continues to soften. The economic implications are more complicated. For policymakers, robust real growth is the headline figure worth celebrating. But low prices can flatter volume-based growth even as they weigh on revenues, profitability and investment appetite. India is confronting this trade-off at a time when global demand is soft, manufacturing continues to underperform, and corporate value addition is slipping.
A deflator-driven boost
Price conditions set the tone for the Q1 data. Both wholesale and retail inflation eased through the quarter and dropped even further in Q2. The downtrend spans global commodities and domestic food prices. As a result, the GDP deflator—India’s broadest inflation gauge—has undershot the consumer price index.
This dynamic automatically lifts real GDP and GVA growth even when the underlying nominal expansion stays modest. It is the reason many economists expect Q2FY26 real GDP growth to print around 7.6–7.7%—lower than Q1 but stronger than many quarters in FY25.
The number will look healthy. But it will owe a great deal to low inflation, not a surge in actual output.
Nominal growth sends a different signal
Nominal GDP matters because it underpins tax collections, influences debt sustainability, and drives corporate revenues. A slowdown here has wider macro consequences than real GDP inflated by soft prices.
In Q1, the gap between nominal and real growth widened. Analysts expect it to stay large when Q2 numbers arrive. That combination—strong real, soft nominal—is not ideal for an economy that must fund rising public capital expenditure, reduce deficits, and catalyse private investment.
Even though GST and direct tax data look upbeat, fiscal math still hinges on expanding the nominal GDP base. Two quarters of subdued nominal growth could force the government to revisit its Budget assumptions more carefully.
Corporate value addition weakens
The more disquieting signals come from the corporate sector. A study of listed non-financial BSE 100 companies shows their gross value added—Ebitda plus employee costs—contracted for the second straight quarter in Q2FY26, and more sharply than in Q1.
This is not the profile of an economy experiencing a broad-based upswing. Manufacturing is showing fatigue. Several service sectors, which have been carrying much of the momentum, are now uneven. Declining corporate GVA is typically a sign of stress on margins, pricing power or demand—and sometimes all three.
A low-inflation environment accentuates these pressures. Firms struggle to raise prices. Input costs may fall, but not always at the pace suggested by wholesale indices. And when nominal wages remain sticky, falling deflators push real labour costs higher. In that setting, shrinking nominal GVA becomes easier to explain.
A recovery built on narrow foundations
None of this means the economy is stumbling. Real growth above 7% for consecutive quarters reflects resilient consumption, stronger urban services and a steady pipeline of public investment. But the recovery remains narrowly concentrated. It leans heavily on government capex, a handful of service industries, and statistical gains from low inflation.
For the expansion to become more durable, India will need a revival in private investment, stronger manufacturing exports and deeper gains in high-value services. Those shifts are not yet evident. Instead, the data sends two conflicting messages—real numbers suggesting strength, nominal indicators pointing to strain.
What to watch next
When the Q2FY26 GDP report is released on November 28, the real growth figure will probably appear reassuring. The nominal number might not. Investors, policymakers and firms would be wise to pay closer attention to the latter.
An economy growing fast in real terms but losing pricing power—and watching corporate value addition slip—is not signalling a crisis. But neither is it signalling a fully healthy recovery.
Low prices may be politically convenient. Economically, they raise tougher questions about the true momentum powering India’s growth story
