Possible shortfall in nominal GDP growth in FY26 due to benign inflation: CEA Nageswaran

New Delhi: Given the expectation of benign inflation, there may be a shortfall in nominal GDP growth compared to the Budget estimate of 10.1 per cent for the current financial year, Chief Economic Adviser V Anantha Nageswaran said.

He expressed optimism about meeting the real GDP growth target of 6.3-6.8 per cent for the current fiscal year despite the US imposing a steep 50 per cent tariff on Indian shipments.

Nominal GDP includes changes in prices caused by inflation, reflecting the impact of rising overall price levels, while real GDP is an inflation-adjusted measure that evaluates the value of all goods and services produced in a country during a specific year.

Inflation is expected to be low on account of an estimated good kharif harvest and a reduction in prices of around 400 items after landmark GST reforms were approved recently by the GST Council headed by Finance Minister Nirmala Sitharaman.

“Some shortfall in nominal GDP growth may be there. I think there is a higher chance of that happening. However, what is encouraging to me is that the nominal GDP growth number at 8.8 per cent for the first quarter was better than what many had feared that it would be, somewhere between 8 and 8.3 or 8.5 per cent,” he said.

“So, I think as the effects of the GST relief and the higher disposable income coming from lower inflation, from the direct tax relief provided in the February Budget, as they all kick in and boost household and domestic consumption in general, some pricing power may return, but overall inflation will remain contained.”

Nominal GDP growth may not fall too far short of the assumed number in the Budget of around 10.1 per cent for the full financial year FY26, he added.

About the impact of GST reforms on GDP, Nageswaran said, “While it will be difficult to quantify it at this point, ultimately much will depend on how the consumers respond and whether it will be offset by any uncertainty related to external trade, etc.”

But given the fact that this is a fairly radical overhaul of the GST structure itself, reducing four rates to two and also doing many other process simplifications, he said the impact on the economy will be fairly substantial, not just in terms of Business to Consumer (B2C), but also in terms of Business to Business (B2B) transactions.

Pinning hopes on the underlying resilience of the Indian economy, Nageswaran said the high growth momentum exhibited in the first quarter of the current fiscal is expected to continue in the coming quarter as well, with a downward bias emanating from high US tariffs.

The Indian economy reported a stronger-than-expected 7.8 per cent growth in April-June, its fastest pace in five quarters.

“I think the first quarter numbers for the fiscal year were definitely better than expected. A lot of people attributed the fact that the GDP deflator was much weaker this year compared to last year; in some sense, the GDP deflator being on the weaker side was a good thing and was not an unknown aspect. That was factored into the consensus expectations of Indian economists in the private sector.

“Yet the GDP growth number for the first quarter in the current fiscal year was much better than expected, it attests the underlying resilience of the Indian economy in general and the lagged effects of various initiatives that the government has been undertaking since its beginning in 2014 and more so in the last two Budgets continued its momentum in the second fiscal quarter as well,” Nageswaran said.

Further elaborating, he said the trade impasse with the US is continuing for the moment, so there will be some impact in the second quarter, as increased tariffs on Indian shipments took effect in August.

A steep US tariff of 50 per cent on goods from India took effect on August 27. The tariffs, among the highest in the world, include a 25 per cent penalty for buying crude oil from Russia. On August 7, the Trump administration enforced a 25 per cent tariff on Indian goods, citing India’s persistent oil imports from Russia and long-standing trade barriers.