India’s GDP growth for the June quarter of FY26 came in at 7.8 per cent, higher than analyst expectations of 6.5–6.8 per cent. However, economists caution that the surge is largely due to a statistical quirk—the unusually low GDP deflator.  | Photo Credit: designer491

The real GDP growth for the June quarter of 2025-26, at 7.8 per cent, came as a surprise to most analysts, who had expected growth in the range of 6.5 to 6.8 per cent. But the jump appears to be due to a technical factor in the computation.

The advance estimates for GDP are computed using the benchmark-indicator method. Here, estimates for the same quarter in the previous fiscal year are extrapolated using real-time data and high-frequency indicators for each sector. These numbers are adjusted by the GDP deflator to arrive at the real GDP growth.

The GDP deflator (explained below) for the first quarter had declined to 0.9 per cent compared to the same quarter last fiscal year. This number is down from 3.1 per cent recorded in the last quarter of FY25. This decline resulted in artificially pumping up the real GDP growth numbers. According to various estimates, the real GDP is overstated by at least 100 basis points.

What is the GDP deflator? How is it calculated?

The GDP deflator is used in national income calculations to adjust the nominal GDP numbers for inflation, thereby arriving at the real GDP number. According to MOSPI, “GDP Deflator, is a comprehensive measure of inflation, implicitly derived from national accounts data as a ratio of GDP at current prices to constant prices.”

The problem is that the deflator uses a combination of WPI and CPI to arrive at the deflator number. It may be recalled that WPI inflation in the first quarter of FY26 was very low, almost close to zero. CPI was also quite low, below 3 per cent in this period. This appears to have made the deflator unusually low, at 0.9 per cent in the first quarter of this fiscal year.

How has the deflator skewed real growth in various sectors?

The real growth numbers in many sectors have been shown higher due to the lower deflator. According to Nomura, “Higher growth in private consumption (where low food inflation plays a bigger role) was likely boosted due to this. Similarly, the pick-ups in export growth and import growth are not mirrored in the nominal trends. In fact, across many sectors, real growth accelerated even as nominal growth fell, reflecting the role of low deflators in boosting real growth.”

Will the deflator affect growth in the coming quarters, too?

Economists expect the low deflator to impact growth in the coming quarters as well, leading to an upward revision in the real GDP forecast for FY26 by 50 to 60 basis points.

According to Emkay research, “Going ahead, the underlying growth story is likely to be muddied by several statistical and external quirks, making it difficult to ascertain growth momentum accurately. We note that real GDP growth is likely to be boosted statistically through the year, due to a mild deflator, especially for Services, which is deflated using WPI amid lack of services PPI. Additionally, while FY26E may see some buffers from consumption due to the impending GST rationalization, Q2FY26 is likely to be a washout for manufacturing (and consumption) as both, producers and consumers, delay manufacturing/purchases ahead of the GST rationalization. Lastly, the US tariff hit will feed through to exports (which were frontloaded in Q1), with a domino effect on employment, wages, and private consumption.”

Nomura notes that growth data for the September quarter appear mixed so far, but real GDP will receive another boost from a low deflator, export frontloading (until August), and base effects, keeping it at an elevated rate of 7.4% y-o-y. “We expect the impact of higher tariffs to be visible after September, leading to a sharper slowdown to 6.0% in the December 2025 quarter and 5.6% in the March 2026 quarter.

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Published on September 2, 2025