Why Falling Prices Made India’s Growth Look Faster

India’s economy surprised many observers with a 7.8% GDP growth rate in the April–June quarter of 2025. At first glance, this is an encouraging sign, especially since it improved on the 7.4% recorded in the previous quarter. But before celebrating too quickly, it’s worth asking: is the economy really growing that fast, or are the numbers flattered by how we measure growth?

To understand this, we need to separate nominal GDP from real GDP. Nominal GDP is the economy measured at today’s prices – it captures both the value of goods and the effect of inflation. Real GDP, on the other hand, tells us how much output actually increased after adjusting for inflation. The tool used for this adjustment is called the GDP deflator.

This quarter, the deflator turned out to be unusually soft. While consumer inflation (CPI) – what households feel in daily expenses – hovered around 6%, wholesale inflation (WPI), which tracks commodity and input prices, was very low and sometimes negative. Because the official deflator relies heavily on wholesale prices, it averaged only about 0.9%. That small number made a big difference.

Here’s why: Nominal GDP grew by 8.8%. Subtract a deflator of 0.9%, and you get real GDP growth of about 7.8%. But if the deflator had been closer to what consumers experienced, say 4–5%, real GDP growth would have looked more like 4–5% too. In other words, part of the strength comes not from factories producing more or services booming, but from the way falling commodity prices boosted the arithmetic.

Economists have long pointed out this limitation. India’s statistical office uses a single deflator for many sectors, rather than separate ones for inputs and outputs. This works fine when prices are stable, but when commodity prices swing sharply, it can distort the picture. When wholesale prices fall, growth appears overstated; when they rise, growth looks weaker than it really is.

So, what does this mean for the big picture? The economy is certainly growing, but the 7.8% headline may be overstating the momentum. The next quarter could show a similar effect if wholesale prices remain soft, even though everyday inflation for households is still high.

For businesses, policymakers, and citizens, the takeaway is simple: GDP numbers are important, but the story behind them matters just as much. Growth is happening, yes, but perhaps not at the runaway pace the headlines suggest.