After securing a rating upgrade from the S&P credit rating agency, India recorded a robust GDP growth of 7.8 per cent in Q1FY26. Growth has been clearly broad-based. Agriculture did well in the last four consecutive quarters. Manufacturing did much better than the last three quarters, while services boomed across the board. Admittedly, production and exports were front-loaded due to the ongoing tariff uncertainty. Still, the overall resilience and health of the economy were unmistakably evident in the data.
Most informed commentators welcomed the numbers. However, the narrow wedge between nominal and real GDP growth rates has been unsettling for a few serious observers. Keeping this in view, this explanatory note aims to reassure stakeholders about the growing resilience of the economy that enables us to withstand external pressures.
Let’s begin by examining how some macro variables fared in Q1FY26. The government’s capital expenditure increased 52 per cent, supported by effective fiscal management. To a great extent, GST collection represents the whole economy, and it grew by 11.8 per cent. Buttressing this is the growth in the volume of e-way bills, which topped 20 per cent. Total exports of goods and services grew by 5.9 per cent, based on the strength of non-petroleum merchandise and services.
These pieces of evidence give a sense of economic momentum. However, GDP is estimated through an exhaustive exercise of analysing diverse datasets to capture all economic activities. Hence, the GDP results cannot be compared with model-based forecasts or evidence constructed with limited datasets.
The methodology
Both annual and quarterly GDP numbers are compiled based on established, publicly available methodology. The information flow for the quarterly compilation of GDP remains limited globally. Hence, quarterly estimates are prepared using the ‘benchmark-indicator’ method. The benchmark estimates are derived from the latest estimates of the previous year. Indicators are derived from credible, relevant datasets spanning the entire spectrum of the economy.
The indicators employed for India’s GDP estimation are a mix of volume indices and values. Wherever volume indicators are used, real values are arrived at first, which are then inflated using the relevant WPI or CPI to derive nominal numbers. Where value indicators are used, nominal estimates are deflated using the relevant WPI or CPI. Therefore, in the case of volume indicator-based estimates, deflators do not have any impact on real GDP growth. However, on the whole, deployment of prices is a critical factor in estimating GDP.
GDP deflator
To keep inflation in check, the Government is meticulously taking administrative, fiscal and trade policy measures. This, along with the monetary policy responses and smoother supply chains, resulted in a steep decline in inflation. While wholesale inflation was only 0.3 per cent in Q1FY26, retail inflation fell to a 25-quarter low of 2.7 per cent. This resulted in a GVA deflator of 1 per cent in Q1FY26.
To elaborate, while estimating quarterly value-added, the compiler has to inflate or deflate values, based on whether the indicator employed is volume-based or value-based. The compiler applies WPI or CPI, depending on the sector at hand, to arrive at nominal and real values. This eventually results in aggregate gross value added in nominal and real terms. The rate of growth in the ratio of the two is the implicit price deflator for GVA. When inflation tends to be lower, naturally the wedge between the nominal and real GDP growth rates declines. Hence, there is nothing baffling about a low deflator for Q1FY26. However, some of the issues raised are deeper, which are explained below.
Is PPI necessary?
A producer price index (PPI) is a price index with quantities, prices, and weights relevant to different types of commodity producers. Input and output PPIs will help deflate intermediate consumption and output respectively. It is desirable that the economy has a PPI to estimate the real GVA. In the absence of a PPI, the current method of GVA compilation employs WPI, wherever applicable. India’s WPI, compiled at basic prices, is very close to an output PPI. Therefore, WPI was found suitable for sectors like agriculture, mining, manufacturing, electricity, construction and a few services. It is unlikely to distort the results in any significant way.
Double deflation
Double deflation, whereby outputs and inputs are deflated by respective prices, is considered the most appropriate way to estimate GVA. However, applying double deflation requires a lot of additional datasets. Some advanced countries employ double deflation for specific sectors, depending on data availability.
India, like most developing countries, applies single deflation method for manufacturing. This involves an assumption that input and output prices are moving in sync. This need not always lead to overstatement of manufacturing GVA. In a situation where output and input price movements are synchronous, the current method will largely reflect the results of double deflation. When input and output prices are diverging, estimates could be overstated or understated depending on the direction of divergence. This is a calculation that is challenged by data availability.
The upcoming GDP series is likely to do away with single deflation and move towards double deflation wherever possible, or use volume extrapolation. Base revision involves a fresh examination of sectors, data sources, prices and emerging best practices, resulting in a new series.
Service prices and GDP
The question about the representation of services in price indices used for GVA estimation has different dimensions. Firstly, the items represented in WPI are those that are traded in the wholesale market. To capture service price movements, a separate price index for services is desirable. Secondly, the weights of items covered under the CPI are derived from the household consumer expenditure surveys (HCES). The private final consumption expenditure (PFCE) on services flowing from National Accounts and the household consumption expenditure on services estimated from HCES are not strictly comparable.
Some important components of PFCE like gross rental incomes imputed for occupancy of own houses by households, financial services like insurance and banking whose values are indirectly estimated are not covered under HCES for justifiable reasons. These items accounted for about 13 per cent of the total PFCE in FY24. Another impactful PFCE component excluded from HCES is the consumption by non-profit institutions.
The work on the revision of the current CPI series is ongoing. The revised series will reflect an updated household basket of goods and services. As indicated in the HCES 2023-24, the share of services in the consumption basket of the upcoming CPI series is likely to be higher than the 2012 series.
To sum up…
The Indian economy is gearing to combat the fast-evolving external policy challenges through reforms, deregulation, market diversification and other policy nudges. In this milieu, the GDP numbers for Q1FY26 unexceptionally indicate India’s economic strength and sound macro fundamentals. That said, the ongoing initiatives of revising the series of major macroeconomic datasets, coupled with fresh survey-based information, will certainly sharpen the evidence base for policy.
Garg is Secretary, Ministry of Statistics and Programme Implementation, and Nageswaran is Chief Economic Advisor, Government of India. Views are personal
The upcoming GDP series is likely to do away with single deflation and
move towards double deflation wherever possible, or use volume extrapolation
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Published on September 6, 2025
