Nominal GDP growth slowdown raises concerns despite strong real growth

Despite strong real growth, slowing nominal GDP and a sharply weaker deflator raise fiscal concerns, challenging Budget assumptions for FY26

India’s latest gross domestic product (GDP) numbers show robust real growth, at 7.8 per cent in Q1 and 8.2 per cent in Q2 of the financial year 2025-26 (FY26), but beneath the headline, the nominal economy is losing momentum as the growth has slowed to single digits, falling short of the Budget’s 10.1 per cent assumption. 

 

A narrowing gap

 

Over the past two quarters, nominal GDP growth has declined, while real growth remained elevated. This reflects a sharp weakening in the inflation component – the GDP deflator. 

 

GDP deflator at 24-quarter low

 

The deflator series shows how sharply price growth in the economy has compressed. The latest reading of 0.47 per cent in Q2FY26 marked a 24-quarter low  — the weakest since Q2FY20, when it was 0.25 per cent. 

 

Fiscal math faces softer nominal base

 

The Centre’s tax to GDP ratio improved from 10 per cent in FY20 to 12.6 per cent in FY25, the highest level in this series. For FY26, the estimate is budgeted at 12 per cent. A lower-than-budgeted nominal GDP means the projected fiscal deficit of ₹15.69 trillion could end up being higher than the estimated 4.4 per cent of GDP for FY26.