India GDP – Indian economy has been contracting in real terms

The GDP data that has just been announced for FY26 does present a picture that is better than expected. At 7.7% real GDP growth for FY26, the actual numbers are almost 30 bps better than what most of the economists had been apprehending.

Real story may lie in the nominal numbers

However, the real story may lie in the nominal numbers, because it is these nominal GDP numbers that determine the overall level of economic activity and jobs creation in the Indian economy. However, if you look at the nominal rate of growth in India in the last 3 years, it has fallen from a high of 11.0% to 8.9% between FY24 and FY26. Then how is the real GDP growth higher? That is due to lower inflation. The sharp fall in inflation in FY26 has led to the real GDP growth being better than previous years, despite the lower nominal rate of growth. However, the question is whether this 8.9% is itself credible?

You get a better picture in dollar terms

Between FY24 and FY26, the rupee GDP has grown by 19.5%, which is impressive. However, what was the growth in dollar terms? For that we need to look at the exchange rates in FY24 and the exchange rates today. During this period, the USDINR has depreciated from ₹82.14/$ to ₹96.20/$; if we ignore the intermittent volatility. If we adjust the nominal GDP for FY24 and FY26 for the depreciation in the rupee, then in dollar terms, the nominal GDP has just grown from $3,529 billion to $3,600 billion. In short, the dollar GDP has grown by just 2.0%, which is around 0.95% growth annually. So, the 8.9% annual growth in nominal GDP is now down to just 0.95% in dollar terms.

If you adjust for inflation; real economy has contracted

One of the basic rules of nominal growth is that you must grow enough to cover inflation and then offer some real growth as a residual item. If you look at the average inflation over the last few years, it has been closer to 4% (remember FY26 was exceptionally low). Now if you adjust 4% inflation to the 0.95% nominal growth, then we have rough estimate of real GDP growth at around -3.0%. In short, the Indian economy has been showing de-growth in real terms (net of inflation). Now the picture becomes clearer. Most of us are wondering why the average household debt is rising and budgets are getting squeezed despite high GDP growth. The answer; India is contracting in real dollar terms.

Now, understand why dollars are such a big problem

The first question people ask is why should I worry about dollar growth, when we earn and spend in rupees. The problems is that Indian trade is still largely denominated in dollars (both exports and imports). On the export front, the services exports led by IT are impacted by the AI disruption. The goods exports have been hit by the tariffs imposed by the US. So, Indian exports are really not making hay from a weak rupee. On the other hand, imports of oil, electronic goods, fertilizers, and gold have shot through the roof. As the rupee weakens, the RBI is using up its forex reserves to defend the rupee. Whether you like it or not, it is dollar growth that actually matters for India!