India’s 7.8% Q1 GDP growth withstands scepticism—sectoral trends and real indicators show momentum beyond mere statistical optics.
Image Source: Getty Images
India recorded real Gross Domestic Product (GDP) growth of 7.8 percent in the April-June quarter of 2025-26, surpassing all expert forecasts and projections. The growth statistic has since then been the target of several debates and methodological attacks. Critics are claiming that India’s higher-than-expected real growth is just an accounting anomaly due to a low GDP deflator.[i] However, that does not convey the entire story. The deflator was unusually low because wholesale prices pruned, and headline inflation cooled down. When the real economy’s pulse is checked through production, capacity utilisation, tax collections, and employment, it shows that demand has stayed firm even as inflation eased. In other words, both demand and supply have grown, with the latter outperforming the former, resulting in higher growth at lower prices.
When the real economy’s pulse is checked through production, capacity utilisation, tax collections and employment, it shows that demand has stayed firm even as inflation eased.
The GDP estimates are generated using a combination of direct and indirect methods. It involves using the production and income approaches in tandem with a multitude of surveys to gauge the output of the entire economy. This leads to the problem of differentiating between real and nominal growth. While the latter indicates an increase in the price value of production, the former represents the tangible increase in production of goods and services. The real and nominal GDP are estimated separately by adding the sectoral outputs at constant and current prices, respectively. Thus, as a first step, the real output of each sector is calculated by using projections, extrapolation, and survey data. The next step is estimating nominal sectoral output by superimposing the appropriate inflation measure.
The GDP deflator is nothing but the ratio of nominal GDP to real GDP, or the percentage difference between real and nominal growth. For instance, if an economy produces 100 units of a good annually, but its price goes up, the real GDP would remain unchanged while the nominal GDP goes up. The deflator expresses the ratio of nominal to real GDP and, therefore, represents the entire price level. It is not a weighted average of the Consumer Price Inflation (CPI) and Wholesale Price Inflation (WPI).[ii] The deflator is calculated from the difference between real and nominal growth and not the other way around. It is an implicit index arising from many sectoral deflators. However, since goods output is large and many goods sectors use WPI-based deflators, the effective influence of WPI on the overall deflator is typically greater than CPI’s effect. Empirically, the deflator correlates more with WPI than it does with CPI.
Figure 1: WPI and CPI in India (Jan’24 – July’25)
Source: Ministry of Statistics and Programme Implementation (MOSPI) and Department for Promotion of Industry and Internal Trade (DPIIT)
Another criticism has been the use of the deflator method. Either a single or a double deflator method can be used. Double deflation deflates both output and inputs separately with their own price indices before subtraction. India follows a single deflation approach for its manufacturing sectors, which risks overestimating real GDP during commodity-price downswings by subduing the deflator. However, this argument does not apply to the quarterly GDP estimates, since they are calculated using the benchmark-indicator method, where real output is estimated first. Thus, on the contrary, a lower WPI can subdue the nominal growth rate.
It needs to be understood that the deflator is arrived at from the difference between real and nominal growth and not the other way around.
To understand what drove growth this quarter, it is essential to examine sectoral shares and their respective growth rates. The primary sector now reserves less than 15 percent of domestic production, and its 2.8 percent growth explains only about 5 percent of the growth. The secondary sector, which includes manufacturing, electricity, and construction, contributed around 25 percent of the growth. The tertiary sector, which accounts for over 56 percent of GDP, primarily drove growth in this quarter, contributing more than two-thirds to the 7.8 percent.
Table 1: Sectoral Growth Rates in the April-June Quarter (2024-25 and 2025-26)
Source: MOSPI
The Purchasing Managers’ Index (PMI) captures survey data encompassing business decisions and is considered an accurate measure of markets globally. The manufacturing PMI touched a 14-month high in June 2025, indicating robust demand and job creation. Similarly, the services PMI was at a 10-month high in June, driven by higher domestic and export demand coupled with softer input prices. The Indian Index of Industrial Production (IIP) is a measure of short-term change in the volume of production of a select basket of industrial products, i.e., a measure of industrial activity. While the general index was 4 points higher in June 2025 on a year-on-year basis, the manufacturing index was over 10 percent higher. The decline in the mining index is reflected in the GDP statistics through a negative growth rate.
Figure 2: Index of Industrial Production (April 2024 – June 2025)
Source: MOSPI
The number of passengers carried by domestic airlines in the January-June period in 2025 was 7.34 percent higher than in 2024. Aggregate bank deposits and credits grew by 10.3 and 10.4 percent, respectively. Capital expenditure, at June end is 24.5 percent of the planned budget expenditure. Thus, public spending is in line with targets and can further strengthen demand with higher momentum. While these real indicators do not capture all economic activity, they suggest that the GDP estimates are not inflated/overstated. The fall in inflation is due to the softening of commodity prices, which is leading to a supply expansion. Steady demand when exposed to rising supply leads to higher output and milder inflation – exactly the situation prevailing in India now.
The Indian Phillips curve is convex, i.e., there is a strict trade-off between inflation and unemployment only when the output gap is high.
Since the beginning of this fiscal year, the government has implemented multiple initiatives to boost aggregate demand. While the personal tax restructuring and Goods and Services Tax (GST) reform were aimed at strengthening consumption demand, government spending has been accelerated to supplement investment demand. Interest rate cuts by the Reserve Bank of India (RBI) are expected to further stimulate domestic credit and investment spending. This has not led to any excessive inflation, spurring concerns about a subdued labour market. However, that is not the case in India since the unemployment rate has decreased from 6.6 percent in June 2024 to 5.6 percent in June 2025. Moreover, the conventional Phillips curve relationship (higher inflation leading to lower unemployment) does not always hold in India’s case.
Figure 3: Indian Phillips Curve (2018-24)
Source: Compiled by author from PLFS and CPI data, created using ChatGPT
The Indian Phillips curve is convex, i.e., there is a strict trade-off between inflation and unemployment only when the output gap is high. In the last quarter of 2024-25, India’s manufacturing capacity utilisation (a proxy for output gap) touched an all-time high of 77.7 percent. This indicates a non-significant unemployment cost of low inflation, shown in Figure 3 through a near-horizontal Phillips curve. Thus, both increasing demand and supply have led to a high-output, low-inflation scenario in India.
The tertiary sector, which accounts for over 56 percent of GDP, primarily drove growth in this quarter, contributing more than two-thirds to the 7.8 percent.
This is not a bad place to be in and gives policymakers some leeway to design reforms. While softening of commodity prices is expanding the supply frontier, the policy focus should be on sustaining this supply expansion through investment in productivity, research and technology. The focus on demand stimulation measures, such as tax cuts, could lead to quick inflation if not balanced with steady supply growth. Supply-side measures will ensure that excessive demand stimulation does not overheat the economy while also gradually increasing GDP. Gradually increasing the economy’s demand and supply can ensure a steady pathway to Viksit Bharat 2047 without excessive noise from price changes.
Arya Roy Bardhan is a Junior Fellow at the Observer Research Foundation.
[i] The GDP deflator is the ratio of the nominal GDP to real GDP, i.e., it explains the difference between nominal growth and real growth. While it is arrived at using the GDP estimates, it can be conceptualized as a weighted average of consumer and wholesale index rates.
[ii] WPI tracks the average movement of prices on the wholesale side or supply side. CPI tracks prices of goods and services paid by consumers – reflecting the demand side.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Arya Roy Bardhan is a Junior Fellow at the Centre for New Economic Diplomacy, Observer Research Foundation. His research interests lie in the fields of ...
Read More +
PREV
