GDP Data for First Quarter of 2025-26 Estimates Higher Growth But Misses Key Indicator

A press note has been issued on Quarterly Estimates of Gross Domestic Product for the first quarter (April-June) of 2025-26 by the National Accounts Division, National Statistics Office, Ministry of Statistics & Programme Implementation, Government of India, estimating an unexpected higher growth rate. However, a closer look at the data shows that it misses a key indicator.

According to the data, the growth rate of GDP for Q1 2025-26 is estimated to be 7.8% compared to the figure of 6.5% for the same quarter last year. It is higher even compared to the 7.4% rate of growth in the immediately preceding quarter, i.e. Q4 of 2024-25. 

This unexpected increase in growth is largely due to the sharp increase in the growth rate of the tertiary sector. It has grown at 9.3% compared to 6.8% last year. The secondary sector growth has declined from 8.6% to 7.0%, while the primary sector has grown at 2.8% compared to 2.2% last year.

Major components of primary and secondary sectors have either declined or shown the same rate of growth as in Q1 2024-25. Mining and quarrying has sharply decelerated from 6.6% to -3.1%, showing a turnaround of 9.7%. 

Electricity, gas, water supply and other utility services sector shows a growth of 0.5% compared to 10.2% last year – another decline of 9.7%. The manufacturing sector has the same growth rate as last year, while the construction sector shows a decline from 10.1% to 7.6%. 

High frequency indicators

There is considerable divergence in growth rates across sectors. But what underlies the sharp increase in growth in the tertiary sector? To answer this, the methodology adopted for making the estimates needs to be analysed. 

The official document states, 

“Quarterly Estimates of GDP are compiled using the Benchmark-indicator method i.e., the estimates available for the same quarter of the previous financial year (2024-25) are extrapolated using the relevant indicators reflecting the performance of sectors.” 

Further, it goes on to say, 

“Year-on-Year growth rates (%) reflected in the major indicators used in the estimation are given in the Annexure B”.

However, the data in the annexure indicates a slowing economy compared to 2024-25. Out of the 22 items listed, only five items show an increase compared to last year – cement production, cargo handled at major sea ports, revenue expenditure, less interest payment and subsidies (Union government), exports minus imports, and capital goods. 

Seven items show a significant decline – production of coal, consumption of steel, sales of private vehicles, cargo handled at airports, railways passenger kilometres, Index of Industrial Production (IIP) mining and IIP electricity. The remaining 10 items show moderate decrease in growth. 

Further, these items also suggest a decline in growth in consumption and in the tertiary sector. Finally, the just released IIP data shows that in Q1 of 2025-26 it barely grew by 2%. So, even the secondary sector growth could not have accelerated.

In brief, if the methodology used in the estimation is taken at face value, the rate of growth in Q1 2025-26 cannot not have increased compared to 2024-25.

Missing data

A major issue in the estimation methodology used is the non-availability of data for the unorganised sector. It is proxied by a little bit of organised sector data. 

For instance, for industries, data is based on ‘Financial Performance of Listed Companies based on available quarterly financial results of these companies’ and IIP. But the former is available for only a few hundred companies and the latter also does not cover the small and the micro sectors which are a thousand times more numerous than the large and medium units captured in the IIP and employ 97.5% of the MSME employment. 

So, the assumption that the unorganised sector can be proxied by the few bits of available organised sector data is incorrect. 

An example can clarify this further. The growth of the sector involving trade, hotels, transport, communication and services related to broadcasting has increased from 5.4% to 8.6%. This sector has a weight of 16.75% in GVA and consists of both the organised and the unorganised components. However, the data is available for this is only for the organised sector, such as e-commerce, which is apparently growing at about 25%. 

Such strong growth can only be at the expense of unorganised trade – the neighborhood retail stores, etc. So, the higher the growth shown for this component of GDP, the greater would be the uncaptured decline in the unorganised sector.

In brief, a declining component of GDP is proxied by a fast rising component, thereby leading to an over estimation of GDP. This hypothesis would also apply to the other major component of the tertiary sector and to the manufacturing sector. Further, the overestimation of GDP would impact the other expenditure components, like private final consumption and investment. 

The Reserve Bank of India’s latest capacity utilisation and consumer confidence data do not indicate any sharp up tick. Since these are based on surveys of the organised sector, they indicate that there could not be a sharp up trend in either capital formation or private consumption as the official GDP data indicates.

Has the error in estimation increased now? If the hypothesis that higher the growth rate of the organised sector, higher the error in estimation of GDP is correct, then indeed, the error has increased. This is the reason for the sharp changes in ‘discrepancies’ since demonetisation and in the disjuncture between high frequency data and estimated growth rates pointed to above.

In brief, as pointed out earlier in these columns, the methodology of estimation needed to be changed post pandemic, GST implementation and demonetisation. And, more data from the unorganised sector needs to be collected so that it is not proxied by the organised sector. Till these two features are rectified, higher GDP growth would be suspicious given the ground reality of inadequate employment generation and persisting poverty in the country.

Arun Kumar is a retired professor of economics, JNU, and the author of ‘Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead’. 2020.

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