Why in News?

• India’s first advance estimate of GDP for 2025-26, released by the Ministry of Statistics and Programme Implementation (MoSPI), projects a sharp rise in real GDP growth to 7.4%.
• This is driven mainly by a rebound in manufacturing and resilient services, despite external shocks such as 50% US tariffs on Indian goods.
• However, nominal GDP growth is projected to slow to 8%, a five-year low, raising fiscal and budgetary implications ahead of the Union Budget 2026-27.

What’s in Today’s Article?

• Key Highlights of the First Advance Estimate
• Implications for Union Budget 2026-27
• Major Structural Change - New GDP Series
• Challenges Highlighted and Way Ahead
• Conclusion

Key Highlights of the First Advance Estimate:

• Real vs nominal GDP growth:
  • Real GDP growth (2025-26) - 7.4% (up from 6.5% in 2024-25).
  • Nominal GDP growth - 8% (lowest in five years, excluding pandemic year).
  • Gap between real and nominal growth - 60 basis points, lowest since 2011-12.
  • This indicates low inflationary pressures or weak price growth.
• Size of the Indian economy:
  • Nominal GDP (2025-26) - ₹357 lakh crore.
  • At an exchange rate of ₹89.89/$, GDP equals $3.97 trillion, just short of the $4-trillion economy milestone.
  • Significance: India nearing $4 trillion economy despite global volatility.
• Sector-wise performance (supply side / GVA):
  • Manufacturing: Growth rebounds to 7% (from 4.5% last year). Despite US tariffs, domestic demand and supply-side resilience remain strong.
  • Agriculture: Growth moderates to 3.1% (from 4.6%). This reflects normalisation after a strong previous year.
  • Construction: Growth at 7% (down from 9.4%) - still robust due to infrastructure push.
  • Services: Strong expansion at 9.1% driven by new-age services, GST rate cuts (in September), and robust services exports.
• Expenditure-side trends (demand side):
  • Private Final Consumption Expenditure (PFCE): Growth at 7% in 2025-26 as against 7.2% in 2024-25.
  • Gross Fixed Capital Formation (Investment): It is expected to rise 7.8%, up from 7.1% growth seen last year.
  • Government Consumption Expenditure: It makes up less than a tenth of India’s GDP, and is expected to see its growth rate more than double to 5.2% this year from 2.3% in 2024-25. This is led mainly by State government spending.
• Second-half slowdown:
  • The first advance estimate implies that GDP growth in October-December 2025 and January-March 2026 will average 6.9%, sharply down from the 7.8% and 8.2% growth rates recorded in the first two quarters.
  • The Reserve Bank of India (RBI), which raised its GDP growth forecast for the year by 50 bps last month to 7.3%, expects the economy to grow by 7% in October-December 2025 and 6.5% in January-March 2026.

Implications for Union Budget 2026-27:

• The first advance estimate of GDP for the year is used by the Ministry of Finance for its Budget calculations.
• The Role of nominal GDP: Nominal GDP growth is a critical input for tax revenue projections, fiscal deficit targets, and debt-to-GDP ratio. Slower nominal growth may constrain fiscal space, and affect revenue buoyancy.
• Example:
  • Budget 2025-26 assumed 10.1% nominal GDP growth to fix the fiscal deficit at 4.4% of GDP.
  • Actual nominal growth (8%) fell short, but the absolute GDP target was met due to revisions.

Major Structural Change - New GDP Series:

• Shift in base year:
  • This first advance estimate will have a short shelf life because GDP data released February 27 onward will be as per a new series with a base year of 2022-23 as against 2011-12 now.
  • Updating the base year is key to a correct picture of the economy.
• Shift includes: New data sources, improved methodologies, and updated benchmarks.
• Importance: Reflects structural transformation of the Indian economy.
• Caution by MoSPI: Estimates will undergo frequent revisions, users must interpret data carefully.
• GDP revisions timeline: The GDP growth figure for 2025-26 will continue to undergo revisions after the second advance estimate is published on February 27, with the final number available only in February 2028.

Challenges Highlighted and Way Ahead:

• Slowing nominal GDP growth: This indicates fiscal management challenges. Maintain fiscal prudence amid lower nominal growth.
• Second-half economic slowdown: Sustain manufacturing momentum through PLI and export diversification. Strengthen investment cycle via public capex and crowding-in private investment.
• Agricultural growth moderation: Boost agricultural productivity to stabilise rural demand.
• External uncertainties (tariffs, global volatility): Continue structural reforms to support medium-term growth (6.5–7%).
• Frequent data revisions may affect policy consistency: Leverage data reforms for evidence-based policymaking.

Conclusion:

• The first advance estimate for 2025-26 underscores the resilience of the Indian economy, with robust real GDP growth of 7.4% despite global headwinds.
• However, the sharp deceleration in nominal GDP growth raises concerns for fiscal planning and revenue mobilisation.
• As India transitions to a new GDP series with an updated base year, policymakers must balance growth support, fiscal discipline, and reform momentum to navigate uncertainties in 2026-27 and beyond.