India’s challenge is no longer generating growth but converting it into development
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India appears to have pulled off a growth miracle. Real GDP grew 7.8 per cent in Q1 FY27, exceeding the RBI’s 7 per cent projection, with real GVA up 8.2 per cent, manufacturing 9.2 per cent, financial, real estate, IT and professional services 12.1 per cent, and investment demand 11.9 per cent. This happened despite conflict in West Asia, elevated oil prices, supply-chain bottlenecks, and concerns over El Niño. The government’s verdict is straightforward: the Indian economy is resilient. Yet, when an economy emerges seemingly unscathed from shocks that strained households and small businesses, the real question is whether the headline numbers reflect the realities beneath the aggregates.Nominal GDP grew 10.3 per cent against 7.8 per cent real, implying a GDP deflator of about 2.3 per cent — a broad inflation proxy that appears surprisingly low given producer-side inflation: producer prices rose 10.7 per cent in manufacturing, 4.98 per cent in agriculture, 19.5 per cent in mining, and 58 per cent in crude petroleum and natural gas. Retail inflation climbed from 3.48 per cent in April to 4.38 per cent in June — surpassing RBI’s 4 per cent target and touching a 19-month high of 4.45 per cent in July. The unusually low implied deflator, therefore, deserves scrutiny.MoSPI attributes this outcome to its double-deflation methodology, under which output and intermediate consumption are deflated separately before real value added is calculated. The approach can generate unusually low, or even negative, sectoral deflators when input prices rise faster than output prices.Lopsided compositionEven after accepting the official 7.8 per cent, its composition tempers the celebration. Financial/ real-estate/ IT/ professional services grew 12.1 per cent (27 per cent of GVA); trade/ hotels/ transport 8.5 per cent (15 per cent); construction and public administration/ defence/other services 7.7 and 7.5 per cent (23 per cent combined) — together 65 per cent of GVA, concentrated in urban, organised India. Agriculture, which employs far more of the workforce than its 17 per cent GVA share suggests, grew just 3.6 per cent; mining contracted. The asymmetry is familiar: growth is strongest where incomes are already high.A deeper concern is how the informal economy is measured. MoSPI’s consultations indicate the informal sector contributes roughly 45 per cent of GDP; government data show 73.2 per cent of non-agricultural workers remain in informal enterprises. Because informal activity cannot be fully measured every quarter, GDP estimation still leans on a benchmark- indicator methodology, under which benchmark estimates are extrapolated from formal-sector indicators such as GST collections, listed-company results, banking data, etc. This works when the two move together; a formal sector plausibly more insulated from this quarter’s oil shock than the informal one means the extrapolation risks overstating nominal GDP — and, for any given deflator, real GDP too.Real private consumption grew 7.1 per cent, well below investment’s 11.9 per cent; investment’s share of GDP rose from 31.4 to 34.3 per cent, while household consumption’s share slipped from 55.8 to 55.6 per cent. Growth leaned more on investment than on consumption — not necessarily bad news for long-term capacity, but a sign that household demand lagged the headline. The pace of growth of net CGST tax collections may seem to support the absence of a broad-based consumption boom.If growth is regarded as high as per the current methodology, inflation low, and informal distress inadequately captured, policy may target an economy healthier than the one most Indians inhabit. The danger is complacency: delayed recognition of weak household demand, inflationary pressures and structural vulnerabilities.India’s achievement should not be dismissed. The deeper question isn’t whether India grew 7.8 per cent — the data confirm it — but whether the headline reflects the economy beyond its organised core: gains concentrated in investment-intensive, urban sectors; consumption trailing investment; the informal economy still measured through proxy extrapolation, despite better data points; and a subdued deflator turning 10.3 per cent nominal growth into 7.8 per cent real growth. None of this proves growth didn’t occur — only that India’s challenge is no longer generating growth but converting it into development.The writer is a faculty member in the Economics & Public Policy Area at IIM Ranchi. Views are personalPublished on September 5, 2026
