Why India’s Economy Is Rising and Slowing at the Same Time

India’s economy in 2025 presents a unique and puzzling picture—so strong in real terms, yet weakening in nominal terms. This rare economic contradiction is why many economists are calling it a “Schrödinger’s economy”: rising and slowing at the same time.

Despite global headwinds such as US tariffs and geopolitical uncertainties, India’s real GDP numbers have consistently beaten forecasts, surprising analysts in both Q1 and Q2. Yet beneath these strong real numbers lies a slower nominal economy driven by low inflation, shrinking value growth, and fiscal pressures.

Here’s a clear, fact-based breakdown of what’s really happening.

Real GDP Growth: Strong, Stable, and Surprisingly Resilient

In 2025, India’s real GDP growth, which removes the effect of inflation, has been notably strong:

• Q1 2025: 7.8%

• Q2 2025: 8.2%

These numbers are impressive given the global environment.

What Is Driving Real Growth?

Key sectors contributed significantly:

• Manufacturing: ~9% growth

• Services: ~9% growth

However, part of this momentum is due to short-term or one-off factors:

• A low base effect

• A very low deflator (below 1%)

• Export frontloading to avoid US tariffs

• Festive-season stockpiling

• Recent GST rate cuts, increasing demand temporarily

On the expenditure side, private consumption strengthened, rising nearly 90 basis points from the last quarter, while investments remained strong, though slightly slower.

The bottom line: In real terms, the economy is expanding quickly and appears healthy.

Nominal GDP: The Hidden Slowdown Beneath Strong Real Growth

While real GDP is surging, nominal GDP, which includes inflation, is slowing sharply.

Nominal GDP growth has fallen from:

• 10.7% in March 2025

• 8.8% in June 2025

• 8.7% in September 2025

This slowdown is happening even as real GDP rises.
The reason: Inflation has fallen faster than expected, pulling nominal growth down.

Nominal GDP has now shown single-digit growth in five of the last six quarters, raising concerns for revenues, profitability, and fiscal math.

Why This Matters: The Real World Runs on Nominal Growth

Nominal GDP might sound technical, but it influences several real-world outcomes.

1. Incomes and Business Revenues Slow

With lower price growth, companies without strong pricing power face shrinking margins.

2. Fiscal Pressure Intensifies

India’s FY26 Budget assumes 10.1% nominal GDP growth.
Lower-than-expected nominal growth automatically makes the fiscal deficit larger as a share of GDP.

3. Tax Collections Mirror the Slowdown

Net tax revenue rose just 9% in the first half of the year—exactly in line with nominal GDP growth.

4. Nominal GDP Contracted in Absolute Terms

A rare but significant issue:
Because nominal GDP shrank in value during the quarter, deficit ratios tightened further, despite high real growth.

This is why slowing nominal growth is considered a structural concern, not merely an accounting quirk.

Three Key Uncertainties That Will Shape 2026

Looking ahead, India’s growth path depends on three major factors:

1. Will GST-Driven Consumption Last?

The recent GST cuts boosted demand temporarily—but it’s unclear if this surge will continue or fade as a one-time effect.

2. The Duration and Impact of US Tariffs

Extended tariffs can:

• Reduce export demand

• Slow output

• Hurt manufacturing employment

The longer they last, the deeper the economic drag.

3. Major Data Revisions Coming in 2026

India will undergo several statistical updates:

• New GDP base year

• New CPI base year

• A revised IIP series (due May 2026)

Past revisions have often produced unexpected changes that can alter growth trends significantly.
Economists expect some surprises.

Where Does This Leave the RBI’s MPC?

RBI Governor Sanjay Malhotra has indicated space for at least one more rate cut.
But this raises a crucial question:

With real GDP above 8% and inflation near zero, why cut rates at all?

The conflicting signals—strong real growth but weak nominal growth—complicate monetary policy decisions. This tension is exactly what makes India’s current situation feel like a Schrödinger’s economy.

Final Takeaway

India’s economy is simultaneously strong and fragile:

• Real GDP shows vigorous, resilient growth.

• Nominal GDP reveals low inflation, weak pricing power, and rising fiscal pressure.

The next phase of growth will depend on external trade conditions, domestic consumption trends, and the significant data revisions scheduled for early 2026.

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Conclusion

India’s “Schrödinger’s economy” highlights a rare moment in economic history—where real growth is strong, but nominal growth is slowing. Understanding this paradox is crucial for interpreting fiscal, monetary, and policy challenges in 2026.

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