India's GDP Surge Masks Hidden Demand Slump

India's economy registered a strong real GDP growth of 8.2% in Q2FY26, its highest in six quarters. However, this headline figure is juxtaposed with a decelerating nominal GDP growth, falling to 8.7% from a higher trajectory. This unusual convergence has sparked concerns that the impressive real growth might be masking underlying demand constraints, with weak price growth potentially inflating output figures.

High-frequency indicators present a less optimistic picture. While sectors like manufacturing and services showed robust growth in quarterly estimates, the index of industrial production (IIP) saw only modest increases, with manufacturing activity indicated as the weakest in nine months by December. Physical parameters such as railway freight and power consumption are also not keeping pace with national income data.

Furthermore, investment figures present inconsistencies. Private investment's share in capital formation remains low, and a slowdown in government investments led to a fall in new project values. Corporate revenue growth outside the financial sector also lagged GDP growth. The real growth in Gross Fixed Capital Formation (GFCF) appears inconsistent with its nominal counterpart, suggesting the foundation of India's growth may warrant a closer examination amidst a domestic demand-driven economy.