There was better-than-expected ‘real’ growth of 8 per cent in the first half of the fiscal (H1 of FY26). ‘Benign’ food prices significantly eased inflation, and GST rate cuts came into effect on September 22. The farm sector saw ‘healthy kharif production’ and ‘better rabi sowing’.
And yet, the Reserve Bank of India (RBI) has flagged deceleration in growth momentum in the second half of the fiscal (H2 of FY26) and beyond.
All the positives listed above are the ones the RBI has been citing for months to claim robust growth momentum, until it reversed its position in recent weeks.
Signals from RBI
RBI Governor Sanjay Malhotra first talked about the deceleration at the last Monetary Policy Committee (MPC) meeting of December 3-5, the minutes of which were released on December 19.
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“Although domestic economic activity remains resilient in Q3, weakness in some leading high-frequency indicators is suggestive of a deceleration in the growth momentum in H2 vis-à-vis H1l” he said. He was supported in his views by two other MPC members.
Now, the RBI’s latest bulletin, released on December 22, also talks of growth deceleration. The Governor also expects growth to “moderate” in H1 of FY27.
As per these projections, growth in H2 of FY26 would be 6.6 per cent, pulling down the full fiscal growth to 7.3 per cent, and that of H1 of FY27 would be “6.7-6.8 per cent”.
Why growth is decelerating
No external factor is responsible for “deceleration” in H2 of FY26 or “moderate” growth in H1 of FY27. The factors listed by the RBI are domestic ones. Here is the list:
1) PMI manufacturing moderated to a nine-month low of 56.6 in November 2025; growth in the Index of Industrial Production (IIP) moderated to 0.4 per cent in October 2025, from 4.6 per cent in September 2025. PMI employment for manufacturing witnessed deceleration in November.
2) Construction indicators, like steel consumption and cement production, recorded modest growth of 2.4 per cent and 5.3 per cent, respectively, in October; electricity demand remained in a contractionary zone in November 2025 (-0.2 per cent for the April-November period).
3) Services PMI continued to decelerate in both input prices and selling prices as a result of the receding cost pressures and firms’ efforts to secure new business.
4) Indicators of rural demand, like retail automobile sales, witnessed a sharp deceleration in the post-festive season, coupled with adverse base effects.
5) Merchandise exports declined sharply in October amid subdued external demand, accompanied by softer services exports. (Although merchandise exports increased in November, trade deficits increased during April-November 2025 to -$89 billion, from -$86.98 billion in the corresponding 2024).
6) State GST growth decelerated.
7) Direct and indirect tax growth decelerated from 12.3 per cent and 8.9 per cent in April-October 2024-25 to 6.0 per cent and 1.5 per cent, respectively, in April-October 2025-26. Direct tax growth fell to 4.2 per cent during April 1-December 17, from 15.6% in the corresponding previous fiscal.
Industrial production sans electricity?
The latest data, released on December 29, shows IIP growth jumped to an unexpected level of 6.7 per cent in November, taking the average growth during the April-November period to 3.3 per cent.
Contrary to what many experts (quoted by business dailies) say, this unusual growth in November is not because of a low base effect. In fact, it was from a high base of 5 per cent in November 2024 (FY25). Neither is it after a post-festival slump. The IIP growth in October (festival month) was 0.5 per cent, which is highly unusual because the GST cut had come into effect on September 22, significantly boosting consumption.
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Besides, growth in electricity production (part of IIP) fell to -1.5 per cent in November, after falling to -6.9 per cent in October, taking the average growth during the April-November period to -0.2 per cent.
Is India shifting to industrial production without electricity? How feasible does that sound?
Sudden burst in IIP growth
Finally, what would explain the sudden burst in the IIP growth in November, at 6.7 per cent? There are no logical explanations.
Here is how industrial production — general IIP as well as core IIP (the cream eight infrastructure sectors of industry) — look in H1 of the fiscal year, when the GDP growth was 8 per cent and the later months of October and November (when growth is decelerating).
There are other indicators that the RBI skipped.
Comptroller and Auditor General (CAG) data show that, during April-November (more than half the fiscal year is over), states’ capex and total expenditure were 34.5 per cent and 50.5 per cent, respectively, of the budgeted allocation (lower than the corresponding previous fiscal). Controller General of Accounts (CGA) data show, the Centre’s capex and total expenditure during April-October of FY26 were 55 per cent and 51.8 per cent, respectively, of the budgeted allocation.
The CAG seems more updated on the states’ accounts than the CGA for the Centre.
Meanwhile, total government expenditure (GFCE) fell 2.7 per cent in Q2 of FY26 (shown in a latter graph).
As for private capex, both domestic and foreign companies dropped their declared projects in Q1 and Q2 of FY26.
Business Standard reported that the domestic private sector pulled out projects worth Rs 14.3 lakh crore in Q2 of FY26, surpassing the previous high dropout of Rs 13.4 lakh crore in Q4 of FY19. This pullout steadily climbed for the fourth consecutive quarter from Q3 of FY25.
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The Hindu reported that US tariff-related uncertainties led to foreign companies pulling out of projects worth Rs 2 lakh crore in Q1 of FY26, over 1,200 per cent higher than the corresponding quarter of FY25.
Deflation, a concern
Deflation has emerged as a major concern. Average headline inflation (CPI) during April-November was 1.8 per cent, lower than the lower tolerance limit of 2 per cent the MPC is mandated to maintain and explain to the Centre if it continues for another month (in December, the average will remain below 2 per cent to complete three quarters).
This deflation is not due to “benign food prices”, as the RBI would have us believe, but a drastic fall in ‘real’ wage growth to 0.5 per cent in FY26 (SBI Research), pulling down income and, thereby, consumption demand and industrial production.
Indian growth numbers, in any case, have remained shrouded in mystery because of the mismatch in the headline GDP growth and growth in its key components.
Disjointed GDP and components
Here is an example for Q1 and Q2 of FY26.
10. While the ‘real’ GDP growth was 7.8 per cent and 8.2 per cent in Q1 and Q2, respectively, that of its key components, like consumption (PFCE), government expenditure (GFCE), gross capital formation (GFCF) and exports, is much less. The following graph maps this mismatch.
Look at the “discrepancies” numbers in the above graph (extreme right) – the gap between the production and expenditure sides of the GDP. The gap is due to higher production numbers than the expenditure numbers.
At 2.3 per cent and 3.3 per cent in Q1 and Q2 quarters, respectively, these discrepancies are unacceptably high.
It was these “sizable discrepancies” that the International Monetary Fund (IMF) asked India to eliminate last month to make its GDP data credible, among others.
How high are the ‘discrepancies’?
Before the twin man-made shocks of demonetisation and GST, it was very small – in the range of 0.3-07 per cent during FY12-FY16. Post the shocks, discrepancies jumped to 2.3 and 3.4 per cent in FY17 and FY18 and remained high since then, thrice crossing the 3 per cent level until FY25.
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Both the shocks severely damaged the informal sector, contributing about 50 per cent to the GDP. The quarterly GDP data are largely based on the formal sector high-frequency indicators, which are used as proxies for the informal sector growth. This means the informal sector data are not reliable.
Other problems
India has other problems in GDP calculations, too.
It doesn’t have the Services Production Index (SPI) or Producer Prices Index (PPI) to double-deflate the GDP numbers, as is the global norm. Its excessive reliance on a single deflator leads to over- or under-estimation of GDP numbers.
Taken together, these factors point to overestimation of growth. Neither the tax relief in the February 2025 budget nor the GST rate cut in September seems to help.
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