India's growth looks strong on paper, but demand tells another story
There has been much technical chatter about rebased GDP. MoSPI has done an honest and consultative revision of the methodology to calculate and estimate GDP. There is no attempt at jiggery-pokery. This is reassuring. However, uneasy questions remain about, one, relationship between growth and inflation; two, relationship of multi-year growth trends with other economic and sectoral trends.
There is little reason for economic stakeholders to worry about a rebasing and methodological improvement exercise. Any resultant change in GDP estimate for the crossover year (FY26 in the current case) will be a one-time business. The pre-rebasing growth estimate was 7.2% real growth. The new rebasing raises that to 7.6%.
Also Read: Space for global growth to remain contested; greater intra-state coordination needed to counter external headwinds: CEA
The uneasiness has to do with the nominal growth estimate: 8.6%, implying a deflator of 1%, the same as with the old series. This is puzzling. Digging a little deeper, goods inflation has been negative for 10 quarters. This has led to a significant jump in the growth rate of manufacturing GVA, which has been revised to 11.5% from 7%. A significant part of this is due to the negative deflator. But a negative deflator would indicate a severe demand problem as nothing has happened on the productivity front, or to prices of global goods. Hence, there is good reason to postulate that manufacturing growth and, therefore, GDP growth is being overestimated.
This unusually low difference between real and nominal growth also has analytical relevance for the India growth story.
It is important to realise that GDP calculations involve first measuring nominal growth. This fell dramatically from 14.2% in FY23 to an estimated 8.6% in FY26. The higher real GDP growth is attributable to a sharp disinflation, and negative inflation in manufacturing.
Many economic indicators that would fuel a growth in domestic demand are constrained, as these respond to nominal growth. Real wages, for instance, are either constant or falling over past 8 yrs, as nominal wage growth has been less than CPI inflation. This obviously depresses domestic demand.
Fiscal deficit-GDP ratio is calculated as a percentage of nominal (not real) GDP. With a collapse in the nominal growth rate, and the post-Covid need to cut fiscal deficit, expansionary government spending is curtailed, further depressing demand.
Disconnect between growth numbers and multi-year trends in things that contribute to growth have been a topic of discussion for some time. Arvind Subramanian has been arguing that GDP growth in India is overestimated.
I was initially not in agreement with him, though I did agree that the economy was stagnating. I argue that this would, eventually, lead to a middle-income trap as there was a structural demand problem. The economy was not able to produce things that the top 40% of Indian income earners wanted at affordable prices without subsidy.
Our entire growth story was focused on meeting demand of the top 10% of income-earners, and subsidy-induced spending by everyone else. This demand problem was already reflecting in stagnating private investment, an ever-increasing share of what I term 'compensatory' expenditures, stagnating real wages and a declining share of manufacturing in GDP.
But in a March 2026 paper, with new evidence, 'India's 20 Years of GDP Misestimation: New Evidence', Abhishek Anand, Josh Felman and Arvind Subramanian show convincingly that growth was overestimated over the past 12 yrs. This means that the stalling of the growth process has occurred sooner than I anticipated.
Also Read: No severe shocks despite crises, says Sitharaman as she highlights India's economic strength
Apart from stagnating real wages and declining manufacturing growth, data show how consumption plus every macroeconomic and financial supply-side indicator has been growing more slowly over time. The sharp fall in nominal growth in recent years is consistent with these trends. They puzzle only if compared with real growth.
What then, to make of real growth?
If real growth was overestimated across the last 10 yrs, then total GDP is smaller than we had thought. This means a smaller consumption, investment and demand base, and that we are not the 4th-largest economy.
The trend real growth rate of the economy over the last decade (excluding the Covid fall and spike) has been just 6%. When CEA V Anantha Nageswaran estimated that real growth would be 7% or less over the past 3 yrs, I thought he was being prudently cautious. Turns out, he was, in fact, wildly aspirational. To achieve 'Viksit Bharat' - even habitually late a la Indian Railways - we will have to increase growth by 200 bps every year for the next 25 yrs.
But what is to be done to unlock higher growth? Given declining nominal growth, and decline in consumption, private investment and sales over the past decade, it's clear that the India growth story faces a severe demand problem. Export-led growth is not an available option. India was not, and is not, a major exporter. It will continue to have a structural CAD over the next 5 yrs. Given the current geopolitical situation, to assume any reversal in that trend is a fool's errand.
There are pathways to a solution. But GoI must listen. And economists trained in the days of the Washington Consensus must stop bleating their tired mantra of labour and capital market reforms and supply-side fixes. The clear and present danger is a structural demand problem that is now upon us.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
There is little reason for economic stakeholders to worry about a rebasing and methodological improvement exercise. Any resultant change in GDP estimate for the crossover year (FY26 in the current case) will be a one-time business. The pre-rebasing growth estimate was 7.2% real growth. The new rebasing raises that to 7.6%.
Also Read: Space for global growth to remain contested; greater intra-state coordination needed to counter external headwinds: CEA
The uneasiness has to do with the nominal growth estimate: 8.6%, implying a deflator of 1%, the same as with the old series. This is puzzling. Digging a little deeper, goods inflation has been negative for 10 quarters. This has led to a significant jump in the growth rate of manufacturing GVA, which has been revised to 11.5% from 7%. A significant part of this is due to the negative deflator. But a negative deflator would indicate a severe demand problem as nothing has happened on the productivity front, or to prices of global goods. Hence, there is good reason to postulate that manufacturing growth and, therefore, GDP growth is being overestimated.
This unusually low difference between real and nominal growth also has analytical relevance for the India growth story.
It is important to realise that GDP calculations involve first measuring nominal growth. This fell dramatically from 14.2% in FY23 to an estimated 8.6% in FY26. The higher real GDP growth is attributable to a sharp disinflation, and negative inflation in manufacturing.
Many economic indicators that would fuel a growth in domestic demand are constrained, as these respond to nominal growth. Real wages, for instance, are either constant or falling over past 8 yrs, as nominal wage growth has been less than CPI inflation. This obviously depresses domestic demand.
Fiscal deficit-GDP ratio is calculated as a percentage of nominal (not real) GDP. With a collapse in the nominal growth rate, and the post-Covid need to cut fiscal deficit, expansionary government spending is curtailed, further depressing demand.
Disconnect between growth numbers and multi-year trends in things that contribute to growth have been a topic of discussion for some time. Arvind Subramanian has been arguing that GDP growth in India is overestimated.
I was initially not in agreement with him, though I did agree that the economy was stagnating. I argue that this would, eventually, lead to a middle-income trap as there was a structural demand problem. The economy was not able to produce things that the top 40% of Indian income earners wanted at affordable prices without subsidy.
Our entire growth story was focused on meeting demand of the top 10% of income-earners, and subsidy-induced spending by everyone else. This demand problem was already reflecting in stagnating private investment, an ever-increasing share of what I term 'compensatory' expenditures, stagnating real wages and a declining share of manufacturing in GDP.
But in a March 2026 paper, with new evidence, 'India's 20 Years of GDP Misestimation: New Evidence', Abhishek Anand, Josh Felman and Arvind Subramanian show convincingly that growth was overestimated over the past 12 yrs. This means that the stalling of the growth process has occurred sooner than I anticipated.
Also Read: No severe shocks despite crises, says Sitharaman as she highlights India's economic strength
Apart from stagnating real wages and declining manufacturing growth, data show how consumption plus every macroeconomic and financial supply-side indicator has been growing more slowly over time. The sharp fall in nominal growth in recent years is consistent with these trends. They puzzle only if compared with real growth.
What then, to make of real growth?
If real growth was overestimated across the last 10 yrs, then total GDP is smaller than we had thought. This means a smaller consumption, investment and demand base, and that we are not the 4th-largest economy.
The trend real growth rate of the economy over the last decade (excluding the Covid fall and spike) has been just 6%. When CEA V Anantha Nageswaran estimated that real growth would be 7% or less over the past 3 yrs, I thought he was being prudently cautious. Turns out, he was, in fact, wildly aspirational. To achieve 'Viksit Bharat' - even habitually late a la Indian Railways - we will have to increase growth by 200 bps every year for the next 25 yrs.
But what is to be done to unlock higher growth? Given declining nominal growth, and decline in consumption, private investment and sales over the past decade, it's clear that the India growth story faces a severe demand problem. Export-led growth is not an available option. India was not, and is not, a major exporter. It will continue to have a structural CAD over the next 5 yrs. Given the current geopolitical situation, to assume any reversal in that trend is a fool's errand.
There are pathways to a solution. But GoI must listen. And economists trained in the days of the Washington Consensus must stop bleating their tired mantra of labour and capital market reforms and supply-side fixes. The clear and present danger is a structural demand problem that is now upon us.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
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