Behind India's GDP growth of 7.8%: The "abnormal" inflation adjustment factor inflates the data

India's latest quarterly economic growth data showed strong performance, but several analysts pointed out that this impressive figure may be exaggerated due to statistical factors and does not fully reflect the true fundamentals of the economy.

Last week's data indicated that the Indian economy grew by 7.8% year-on-year in the April to June quarter, marking the fastest growth rate in over a year and significantly exceeding the median forecast of 6.7% by economists. This unexpected performance comes as the market closely watches whether the country's economy can withstand the pressure from the 50% tariffs imposed by the U.S. that took effect last week.

Despite the strong data, economists from Goldman Sachs, HSBC Holdings, and Nomura Holdings stated in their reports that a lower "deflator" may have inflated the overall data, exaggerating the true potential growth. Nevertheless, this data still boosted market sentiment, with the Mumbai Nifty benchmark index rising by as much as 0.8% during Monday's trading.

Analysts generally believe that despite the potential distortion in the data, they will still raise their full-year growth forecasts for India for the current fiscal year. However, these forecasts also account for the impact that the significant increase in U.S. tariffs may bring.

Interpretation of the "Deflator Effect"

The core issue pointed out by analysts lies in the GDP deflator used to exclude the impact of inflation. The GDP deflator adopted by India is closely related to the Wholesale Price Index (WPI), while the Consumer Price Index (CPI) is the primary inflation target of the Reserve Bank of India.

Since the WPI turned negative in May, the GDP deflator has been abnormally low, which artificially exaggerates the economic growth rate when calculating real GDP. Goldman Sachs economist Santanu Sengupta stated in a report:

"Considering the distortions brought about by an unusually low deflator, the headline number may have exaggerated the actual potential growth to some extent."

He believes that if a revised deflator were used, the GDP data could be lower by 50 basis points.

HSBC's Pranjul Bhandari estimated that this "exaggeration caused by the deflator" could be as high as one percentage point. She expects this issue may persist over the next two quarters, leading to "some discrepancies between official GDP data and high-frequency economic indicators."

Upgrading Growth Expectations but Doubts About Fundamental Demand

Despite reservations about the composition of the data, many institutions have thus "statistically" raised their economic growth expectations for India for the year. Nomura has raised its growth forecast for the Indian economy for the current fiscal year from 6% to 6.6%, while Goldman Sachs has increased its forecast from 6.1% to 6.7%.

However, analysts emphasize that this upgrade does not reflect a change in the optimistic view of the economic fundamentals. Nomura economists Sonal Varma and Aurodeep Nandi wrote in their report that the GDP data "is not a signal of strong underlying demand," **as its growth has been boosted by the low deflator and the advance shipments to the U.S. in response to tariffs **

At the same time as the data was released, the market could not ignore the challenges posed by the external environment. According to CCTV News, on August 25 local time, the U.S. Department of Homeland Security issued a notice proposing to impose a 50% tariff on Indian goods starting from midnight on August 27. The market expects the impact to be reflected in the data after September.

This external shock is a negative factor that cannot be ignored in economic forecasts. According to Goldman Sachs' estimates, although they expect these tariffs to be gradually lifted by the end of the year as negotiations progress, the overall impact may still reduce India's annualized GDP by 0.9 percentage points.

This means that for the remainder of this year, the tariffs will impose an additional drag of about 20 basis points on India's actual growth. How to digest this external pressure will be a direct test for the Indian economy