How India grew 7.8% even as oil shock squeezed purchasing power

Amid global uncertainty fuelled by the ongoing West Asia war, India has exceeded expectations.

Real GDP (Gross Domestic Product) grew 7.8 per cent in April to June 2026, to Rs 81.36 lakh crore, against 6.9 per cent in the same quarter last year and 8.6 per cent in January to March. Real GVA (Gross Value Added) grew 8.2 per cent. Nominal GDP grew 10.3 per cent. The Monetary Policy Committee had projected 7.0 per cent for the quarter on August 5.

Those are the headline figures in the press note the National Statistics Office released on August 31, 2026, and they are correct as far as they go. They measure volume. The same press note contains enough, in Statements 1 to 4, to measure price and income as well, and on those measures the quarter looks different. It also contains evidence that the 7.8 per cent itself is likely to be revised up.

What drove India’s 7.8 per cent GDP growth?

Start with what grew. Of the 8.2 per cent growth in real GVA, the category called financial, real estate, ownership of dwellings, IT, and professional services contributed 3.2 percentage points on a 26.4 per cent share. Its growth was 12.1 per cent, and its implicit deflator was 0.5 per cent. Its indicators are bank loan, deposit and interest data, so with credit growing 19.3 per cent, a quarter of the economy is now measured through the balance sheets of its lenders. Manufacturing contributed 1.3 points, trade and transport 1.3, public administration and other services 1.0, construction 0.7, agriculture 0.6. Mining subtracted 0.1.

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While congratulating Indians on the economy growing 7.8 per cent in the April-June quarter, PM Narendra Modi said that the latest growth figures demonstrated India’s ability to maintain momentum despite global instability, wars and disruptions to supply chains.

Why do the price numbers tell a different story?

Now read the prices. The GDP deflator rose 2.3 per cent. The GVA deflator rose 3.0 per cent. CPI (Consumer Price Index) inflation averaged 3.9 per cent across the quarter, and WPI (Wholesale Price Index) inflation was near 10 per cent throughout. A deflator below both is unusual, and the reason is the method. The new series deflates manufacturing output and intermediate consumption separately. Nominal manufacturing GVA rose 7.7 per cent while real manufacturing GVA rose 9.2 per cent, so the manufacturing deflator was minus 1.4 per cent in a quarter when the producer price index for manufactured products rose 10.7 per cent and the index for crude petroleum and natural gas rose 58.0 per cent.

The press note says this can happen “when input prices increase faster than output prices”. Mining contracted 2.4 per cent in real terms while its deflator rose 25.3 per cent. The two sectors are the same oil shock seen from opposite ends.

How did the oil shock squeeze India’s purchasing power?

The largest price effect is in trade. The export deflator rose 12.3 per cent. The import deflator rose 32.3 per cent. In current prices, the trade deficit widened from Rs 1.12 lakh crore to Rs 2.38 lakh crore. In constant prices, it narrowed from Rs 2.64 lakh crore to Rs 0.37 lakh crore, because real imports fell 1.1 per cent while nominal imports rose 30.9 per cent. That narrowing contributed 3.0 points to real growth. It is correct as a volume measure. What it omits is the terms of trade. The 2008 System of National Accounts provides for this through the trading gain, the difference between the real trade balance and the nominal trade balance deflated by a common price index.

Using the GDP deflator, the trading gain was plus Rs 1.58 lakh crore a year ago and minus Rs 1.83 lakh crore now, a swing of 4.5 per cent of last year’s real GDP. Real gross domestic income, which is real GDP plus the trading gain, therefore grew about 3.2 per cent, or 3.8 per cent using the import deflator as the index. The estimate leans on the quarterly import deflator, the least robust series in the release. The direction does not. The economy produced 7.8 per cent more. What that production could buy grew by less than half of that.

Where did the rest go? Some went abroad as the oil bill. Some was absorbed at home. The deflator for net taxes on products was minus 4.2 per cent. Net taxes are taxes less subsidies, and the CGA’s first-quarter figures show the Centre’s major subsidies on food, fertiliser and petroleum up 37.4 per cent after falling 7.3 per cent a year earlier. The fertiliser subsidy indicator is up 57.6 per cent, the Union excise indicator down 22.4 per cent, and retail petrol and diesel have not moved since July.

Nominal net taxes fell 0.4 per cent, which is why GDP trails GVA by 40 basis points. The household consumption deflator was 2.6 per cent. The shock reached the Budget before it reached the consumer. The Reserve Bank absorbed the other half. The FCNR(B) swap window brought in $65.4 billion by 21 August with the rupee at 95.7 to the dollar, and the rupees created against those dollars are why daily absorption under the LAF averaged Rs 3.48 lakh crore in August against Rs 0.89 lakh crore in June.

India’s economy remained resilient despite the high crude oil prices affected by the US-Iran war. Representational image

Why could the 7.8 per cent growth figure be revised upwards?

That is the case for reading 7.8 per cent as smaller than it looks. There is an equally strong case, from the same tables, for reading it as too small. Two things point that way. First, the discrepancy line in Statement 2 is minus Rs 1.06 lakh crore, or 1.3 per cent of GDP, against plus Rs 1.37 lakh crore a year ago. The seven identified components of expenditure grew 11.2 per cent, and the residual pulled 3.2 percentage points out of that to reconcile it with the production side. A negative residual of that size means the demand indicators are running well ahead of the supply indicators, and in past cycles it is the supply side that has been marked up when fuller data arrived. Second, the nominal side of the economy is growing much faster than the nominal side of the accounts.

The RBI’s sample of 3,225 listed non-financial companies shows sales up 19.5 per cent and operating profit up 19.3 per cent in the quarter, with manufacturing operating profit up 21.3 per cent. Listed banks and financial companies grew net profit 24.7 per cent. The Centre’s net tax revenue rose 17.8 per cent and corporation tax 19.7 per cent. Nominal GVA in the accounts grew 11.5 per cent and nominal GDP 10.3 per cent. The quarterly estimate extrapolates last year’s benchmark with a listed-company indicator. The annual revision replaces that with the full corporate filings under MCA-21, and when the gap between listed-company nominal growth and the benchmark is this wide, the revision has historically gone one way. The 7.8 per cent is a floor, not a ceiling.

What do the numbers mean for India’s economy ahead?

Both readings are right, and they are not in tension. The volume of what India made in the quarter was probably higher than 7.8 per cent. The purchasing power of what it made was certainly lower, because the price of oil went to the Gulf and the cost of holding it back went to the Budget and the Reserve Bank.

The next three quarters will test which reading matters more. The Indian basket averaged $89.7 a barrel in August, and the Chief Economic Adviser expects no material fall. The IMD expects August and September rainfall below 94 per cent of the long-period average. The rupee is past its March record, and the FCNR(B) window closed on August 31. The additional 10 per cent Section 301 tariff took effect on July 24.

The base hardens from the second quarter. Nominal GDP at 10.3 per cent against the 12.5 to 13 per cent the fiscal arithmetic assumed leaves the revenue account no room. None of that changes what happened in April to June. The national accounts count what was made. They are less good at counting what it bought, and slower still at counting all of it.

(Aditya Sinha [X: @adityasinha004] writes on macroeconomics and geopolitics. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.)