Low Inflation, Also, Boosted Real Growth By Making Nominal Spending More Effective.....

 India's recent strong real GDP growth in Q1 and Q2 FY2025-26 was a result of a combination of factors: low inflation boosted real growth by making nominal spending more effective, a low base from the previous year provided a statistical boost, and robust government spending, particularly in capital expenditure, helped drive growth across sectors like manufacturing and services. India's real GDP growth accelerated significantly in the first two quarters of FY2025-26, with figures of 7.8% and 8.2% respectively. This impressive performance was not solely due to spending but was significantly amplified by favorable statistical conditions, namely a low base effect from the previous year and a low inflation rate, alongside increased government spending. This analysis attributes the strong growth to these intertwined factors, supported by recent data from Q1 and Q2 FY2025-26.

Low inflation and base effect

Low inflation: Low inflation reduced the gap between nominal and real GDP growth. In Q1 FY2025-26, the gap was only around 1% (8.8% nominal vs. 7.8% real), much smaller than the previous year when high inflation widened this gap. This indicates that the economy achieved strong real gains without a corresponding increase in nominal spending, effectively magnifying the real growth rate.

Low base effect: A lower growth rate in the previous year's corresponding quarter created a more favorable base for the current period. This statistical effect made year-over-year comparisons show a larger percentage increase, as seen in manufacturing which grew at 7.7% in Q1 FY2025-26 compared to the previous year.

Government spending

Capital expenditure: High government spending, especially on capital expenditure (capex), supported strong growth in sectors like manufacturing and construction.

Nominal government final consumption expenditure: Nominal Government Final Consumption Expenditure (GFCE) bounced back, growing at 9.7% in Q1 FY2025-26 compared to 4.0% in the same quarter of the previous year.

Boost for sectors: Government spending helped drive growth in the Secondary Sector (8.1%) and the Tertiary Sector (9.2%), which includes services like public administration, defense, and other services. 

India's strong real GDP performance in the first two quarters of FY2025-26 was a result of a synergistic combination of factors. Low inflation provided a significant boost by allowing real gains to be more apparent, while the low base effect from the previous year amplified the growth figures. This was further bolstered by increased government spending, particularly on capital projects, which stimulated growth in key sectors of the economy. This combination of statistical tailwinds and proactive government investment has created a positive economic environment, evidenced by the robust growth rates observed in recent data.