​Questionable cheer: On GDP growth numbers

The GDP growth numbers released on Friday (August 29, 2025), showing that growth in Q1 of this financial year stood at 7.8%, came as a pleasant surprise at a time when most of the commentary has been about the factors holding growth back. For instance, even the Reserve Bank of India, as recently as August 6, 2025, had predicted that growth would be at 6.5% in Q1. It was off by a significant 1.3 percentage points less than a month before the data came out, something it must introspect about. Within the data, the strong manufacturing sector growth, of 7.7%, was especially heartening given that it came on a relatively high base of 7.6% in Q1 of last year. Some commentators have said that this is because companies were ramping up production and exports ahead of the August tariff deadline by the U.S. However, given that merchandise exports grew just 1.6% in Q1, the more likely reason is that companies were catering to domestic demand. However, the numbers released by the government do not provide much clarity here. The manufacturing sector, as measured by the Index of Industrial Production, grew at 3.3% in Q1, slower than the 4.3% seen in Q1 last year. Steel consumption was drastically slower in Q1 this year than last year. Both private and commercial vehicle sales actually contracted 5.4% and 0.6%, respectively, in Q1. Railway freight traffic grew by 2.5% versus 5% last year, while air freight grew at 5.4% compared to 13.9% last year. Two-wheeler vehicle sales contracted 6.2% while three-wheeler sales were flat at 0.1% growth. Diverse data show that the core and consumer sectors were slowing, and so the pickup in the manufacturing sector is worth a deep examination. The strong performance by the services sector is welcome, and shows how dependent the Indian economy is on this sector.

Chief Economic Adviser V. Anantha Nageswaran has said that the government was retaining its 6.3%-6.8% growth prediction for the year. This means that, with 7.8% in Q1, the government expects growth to significantly slow down in the remaining three quarters, despite its statements about the limited impact of the U.S. tariffs. The data also call into question the robustness of the statistical system, since a nominal GDP growth of 8.8% assumes that inflation was just 1% in Q1. Clearly, price levels are not being captured adequately. A relatively low nominal growth rate also makes it more challenging for the government to meet its fiscal deficit targets, especially at a time when it expects a revenue hit due to the upcoming GST rate cuts. Overall, the GDP numbers have brought cheer, but also several questions.