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GDP Data for First Quarter of 2025-26 Estimates Higher Growth But Misses Key Indicator

Arun Kumar

30/Aug/2025: A press note has been issued on Quarterly Estimates of Gross Domestic Product for the first quarter (April-June) of 2025-26 by the National Accounts Division, National Statistics Office, Ministry of Statistics & Programme Implementation, Government of India, estimating an unexpected higher growth rate. However, a closer look at the data shows that it misses a key indicator.

According to the data, the growth rate of GDP for Q1 2025-26 is estimated to be 7.8% compared to the figure of 6.5% for the same quarter last year. It is higher even compared to the 7.4% rate of growth in the immediately preceding quarter, i.e. Q4 of 2024-25.

This unexpected increase in growth is largely due to the sharp increase in the growth rate of the tertiary sector. It has grown at 9.3% compared to 6.8% last year. The secondary sector growth has declined from 8.6% to 7.0%, while the primary sector has grown at 2.8% compared to 2.2% last year.

Major components of primary and secondary sectors have either declined or shown the same rate of growth as in Q1 2024-25. Mining and quarrying has sharply decelerated from 6.6% to -3.1%, showing a turnaround of 9.7%.

Electricity, gas, water supply and other utility services sector shows a growth of 0.5% compared to 10.2% last year – another decline of 9.7%. The manufacturing sector has the same growth rate as last year, while the construction sector shows a decline from 10.1% to 7.6%.

High frequency indicators

There is considerable divergence in growth rates across sectors. But what underlies the sharp increase in growth in the tertiary sector? To answer this, the methodology adopted for making the estimates needs to be analysed.

The official document states,

“Quarterly Estimates of GDP are compiled using the Benchmark-indicator method i.e., the estimates available for the same quarter of the previous financial year (2024-25) are extrapolated using the relevant indicators reflecting the performance of sectors.”

Further, it goes on to say,

“Year-on-Year growth rates (%) reflected in the major indicators used in the estimation are given in the Annexure B”.

However, the data in the annexure indicates a slowing economy compared to 2024-25. Out of the 22 items listed, only five items show an increase compared to last year – cement production, cargo handled at major sea ports, revenue expenditure, less interest payment and subsidies (Union government), exports minus imports, and capital goods.

Seven items show a significant decline – production of coal, consumption of steel, sales of private vehicles, cargo handled at airports, railways passenger kilometres, Index of Industrial Production (IIP) mining and IIP electricity. The remaining 10 items show moderate decrease in growth.

Further, these items also suggest a decline in growth in consumption and in the tertiary sector. Finally, the just released IIP data shows that in Q1 of 2025-26 it barely grew by 2%. So, even the secondary sector growth could not have accelerated.

In brief, if the methodology used in the estimation is taken at face value, the rate of growth in Q1 2025-26 cannot not have increased compared to 2024-25.

Missing data

A major issue in the estimation methodology used is the non-availability of data for the unorganised sector. It is proxied by a little bit of organised sector data.

For instance, for industries, data is based on ‘Financial Performance of Listed Companies based on available quarterly financial results of these companies’ and IIP. But the former is available for only a few hundred companies and the latter also does not cover the small and the micro sectors which are a thousand times more numerous than the large and medium units captured in the IIP and employ 97.5% of the MSME employment.

So, the assumption that the unorganised sector can be proxied by the few bits of available organised sector data is incorrect.

An example can clarify this further. The growth of the sector involving trade, hotels, transport, communication and services related to broadcasting has increased from 5.4% to 8.6%. This sector has a weight of 16.75% in GVA and consists of both the organised and the unorganised components. However, the data is available for this is only for the organised sector, such as e-commerce, which is apparently growing at about 25%.

Such strong growth can only be at the expense of unorganised trade – the neighborhood retail stores, etc. So, the higher the growth shown for this component of GDP, the greater would be the uncaptured decline in the unorganised sector.

In brief, a declining component of GDP is proxied by a fast rising component, thereby leading to an over estimation of GDP. This hypothesis would also apply to the other major component of the tertiary sector and to the manufacturing sector. Further, the overestimation of GDP would impact the other expenditure components, like private final consumption and investment.

The Reserve Bank of India’s latest capacity utilisation and consumer confidence data do not indicate any sharp up tick. Since these are based on surveys of the organised sector, they indicate that there could not be a sharp up trend in either capital formation or private consumption as the official GDP data indicates.

Has the error in estimation increased now? If the hypothesis that higher the growth rate of the organised sector, higher the error in estimation of GDP is correct, then indeed, the error has increased. This is the reason for the sharp changes in ‘discrepancies’ since demonetisation and in the disjuncture between high frequency data and estimated growth rates pointed to above.

In brief, as pointed out earlier in these columns, the methodology of estimation needed to be changed post pandemic, GST implementation and demonetisation. And, more data from the unorganised sector needs to be collected so that it is not proxied by the organised sector. Till these two features are rectified, higher GDP growth would be suspicious given the ground reality of inadequate employment generation and persisting poverty in the country.

[Arun Kumar is a retired professor of economics, JNU, and the author of Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead. 2020. Courtesy: The Wire, an Indian nonprofit news and opinion website. It was founded in 2015 by Siddharth Varadarajan, Sidharth Bhatia and M. K. Venu.]

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In another article also published in The Wire, The Masked Reality of India’s Growth Numbers, Deepanshu Mohan adds (extract):

India’s GDP from the recent growth numbers grew 7.8% in the first quarter of the current financial year (FY 2025-26), a five-quarter high that confirmed the country’s position as the fastest-growing major economy in relative comparison to other nations which are currently witnessing a recessionary phase amid uncertainty and a weak growth macro-outlook.

However, beneath the surface, India’s own economy today embodies a major structural paradox despite the 7.8% first-quarter growth: it often projects a short-term growth sprint that masks deeper structural fragilities which miss the attention of headline-managers in news studios.

The current Indian growth story, in its structural composition, is being driven less by organic private dynamism and more by precarious fiscal spending coming from the government’s major infra-and public investment push. The industrial revival remains narrow and the labour market wallows in a deeper crisis – as it has stayed for eight to nine years now.

This is not a theoretical risk but an existential danger. With the Labour Force Participation Rate (LFPR) hovering at an alarmingly low 54.2% and the female LFPR languishing at a mere 30.2%, the numbers signal a demographic dividend in peril.

Compounding these stress-points are severe external vulnerabilities, most notably a punitive 50% US tariff shock and the sustained foreign capital flight. India’s trajectory resembles a runner surging ahead while carrying an unacknowledged burden that threatens to sap their stamina before the finish line.

This disquieting reality becomes clearer when the 7.8% growth figure is disaggregated. The expansion was propelled primarily by a 7.8% year-on-year surge in public capex (capital expenditure), creating a powerful fiscal impulse.

However, the reliance on Keynesian pump-priming is a double-edged sword, risking the creation of unproductive assets and proving unsustainable against the backdrop of a fiscal deficit that already strains public finances.

It masks a persistently negative output gap, suggesting the economy is still performing well below its potential because of the private sector slack. The most alarming signal comes from Private Final Consumption Expenditure (PFCE), the bedrock of the economy, which decelerated to 7%, down from 8.3% a year ago.

While PFCE still accounts for 60.3% of the GDP, its weakening momentum is a textbook symptom of a K-shaped recovery. This bifurcation, an oft-made remark on India’s development trajectory in a post-Covid economy, is further mirrored in the financial markets, where equity indices soar to record highs, creating a dangerous disconnect from the on-ground reality of anaemic corporate earnings and stressed household balance sheets.

The strain on households is immense. Financial savings as a share of GDP fell to 5.1% in 2023-24, the lowest in over a decade, as families drew down savings to sustain consumption. Such dis-savings are not sustainable and foreshadow future demand compression. Persistent inflation has worsened the problem.

This explains why rural discretionary consumption — on items like two-wheelers and consumer durables — remains sluggish.

Contrast this with the luxury car segment, where sales grew over 20% year-on-year, a stark indicator of deepening inequality, which is further corroborated by the Gini coefficient hovering at historically high levels.

On the supply side, the recovery is dangerously skewed. The Index of Industrial Production (IIP) rose to 5% in January , but this was marred by the mining sector (-7.2%), which continued to contract in July 2025.

Critically, capacity utilisation in manufacturing remains below 75%, far from the 80-85% threshold that typically triggers a private capex cycle. The celebrated uptick in electronics exports conceals the fact that India’s value-added share in this sector is less than 20%, with most operations confined to final assembly.

Without backward integration, this is unlikely to catalyse skill upgrading or technological deepening. The hollowness is now exposed by external shocks. The US tariffs announced in August 2025 cover sectors worth $86 billion in annual exports.

With two-thirds of these exports likely to be hit, the net export loss would be $25 billion-$30 billion, translating to a GDP drag of 60-80 basis points annually. Ultimately, India’s growth spurt looks less like an industrial renaissance and more like a fragile, state-funded expansion with a hollow core — a fiscal illusion rather than a structural transformation.

Deep-seated cracks and policy contradictions

The quarterly surge rests atop chronic structural weaknesses that threaten long-term stability. The labour market is the clearest fault line. Labour Force Participation fell to 54.2% in June 2025, with the female LFPR languishing at just 30.2% (33.6% in rural areas, 22.9% in urban areas). By contrast, male LFPR stood at 78.1% for rural areas and 75% for urban areas.

The Worker Population Ratio declined to 51.2%, and official unemployment was 5.6%, even as urban youth joblessness soared to 18.8% in May. Put differently, nearly one in five educated young urban Indians is unemployed, a textbook case of “jobless growth”.

This is not merely a cyclical issue. India risks hysteresis, where temporary downturns lead to permanent detachment from the workforce and erosion of skills.

Agriculture still employs over 42% of the workforce but contributes barely 18% to the GDP, clear evidence of disguised unemployment. The productivity differential between agriculture and modern industry is widening, yet the shift of labour across sectors remains stalled. Without labour-intensive industrialisation, the demographic dividend could flip into a demographic liability.

External vulnerabilities deepen the picture. The current account deficit widened to 0.2% of the GDP in the first quarter of FY 2025-26, driven by weaker exports and higher energy imports.

Foreign portfolio investors (FPIs) withdrew nearly Rs17,700 crore from equities in July 2025, reflecting a global risk-off cycle as US bond yields hardened. India’s forex reserves, though still above $600 billion, have been drawn down by approx declined by $2.07 billion since April. This echoes a classic “twin deficit problem”: a fiscal deficit near 5.6% of the GDP and a widening current account deficit, both making India dependent on volatile capital inflows.

The Reserve Bank of India (RBI) is caught in a policy trilemma: defending the rupee, anchoring inflation and supporting growth. If the RBI raises policy rates to curb imported inflation and defend the currency, it risks choking the fragile recovery. If it stays accommodative, it risks fuelling asset bubbles and worsening capital flight. The rupee, down approximately 3% against the dollar in 2025, illustrates this bind.

Financial markets themselves reveal the disconnect. The Nifty-50’s forward price-earnings ratio trades at 23.3, far above the EM average of 12-13. Yet, corporate profit growth in Q1 FY26 was just approximately 3% year-on-year. This suggests that equity markets are levitating on liquidity and sentiment, not fundamentals. A “Minsky Moment”, a sudden collapse in asset prices after a speculative build-up, looms as a risk.

Banking fragility persists. Despite non-performing assets (NPAs) declining to approximately 3 per cent of advances, risk aversion remains high, with MSME credit growing by 14.1% far below overall bank credit growth of 12%. This is alarming because MSMEs contribute almost 46 per cent of India’s exports and are precisely the sectors most exposed to tariff shocks. Credit rationing here worsens employment losses and amplifies distress.

Policy contradictions further compound these vulnerabilities. The Production Linked Incentive (PLI) scheme has created short-term gains in sectors like electronics and pharmaceuticals but has not incentivised innovation.

India’s Gross Expenditure on Research and Development (GERD) remains stuck at approximately 0.6-0.7% of the GDP, compared to 2.6% in China, 3.4% in the US, and 5.2% in South Korea. In absolute terms, GERD rose from Rs 6.02 lakh crore in 2010-11 to approximately Rs 12.74 lakh crore in 2020-21 but the ratio to GDP stagnated. The result is predictable: India remains at the assembly stage of global value chains, unable to design or innovate at scale.

[Deepanshu Mohan is Professor of Economics and Dean, IDEAS, Office of InterDisciplinary Studies, and Director, CNES. He is a visiting professor at the London School of Economics and currently a visiting fellow to the Asian and Middle Eastern Studies Department at the University of Oxford.]