Low deflator lifts Q2 growth; effect seen fading next year

India’s second-quarter economic growth got a leg up from a low deflator, economists said. The low deflator is projected to positively influence growth figures in the upcoming quarters as well, given extremely low wholesale and retail inflation. Economists, however, expect the impact to reverse in the next fiscal year and caution about some negative fallout. A low deflator makes the real growth look stronger because the adjustment for inflation is small. Nominal gross domestic product grew 8.7% in the quarter ended September 30 compared with 8.8% in the previous quarter, while real GDP growth accelerated to 8.2% from 7.8%. The gap between the real and nominal GDP is the smallest since the third quarter of fiscal 2020. “Next year, the cycle will turn. Real growth figures will be lower as the base will be high and the deflator will normalise,” said Sakshi Gupta, principal economist at HDFC Bank.

Deflator, which measures price changes across the economy, is used to convert nominal GDP, which is measured at current prices, into real GDP measured at constant prices. A soft deflator yields real GDP growth that is very close to nominal GDP.

The deflator was 0.5% in Q2FY26 compared with 0.9% in the previous quarter.

Rajani Sinha, chief economist at CareEdge Ratings, said: “By the fourth quarter of FY26, the low base effect will wane, and the deflator will also increase from the current low levels.”

Sustained low nominal growth is ideally not favourable for the economy, explained Gupta. Low nominal growth tends to have an influence over corporate earnings, sales growth, and credit growth and has fiscal implications.”While the increase in real GDP is encouraging, the slower nominal growth resulting from a significant decline in inflation could have adverse implications,” said DK Joshi, chief economist at Crisil. It complicates the achievement of tax targets, which are based on nominal growth assumption of 10.1% for FY26, he said.