India’s GDP growth rate for the quarter ended June, which came in at 7.8% in real terms, surpassed all expectations. But the growth in GDP by another measure has economists and policymakers worried: the economic output in nominal terms.
At 8.8%, nominal GDP growth was only one percentage point higher than the real growth rate, reflecting the impact of the ongoing phase of low inflation in the country. This is a drop from 10.8% in the preceding quarter.
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India’s economic growth in the first quarter of FY2025-26 came as a big surprise. The economy clocked a five-quarter high growth of 7.8%, defying expectations of a slowdown.
Mint looks at the numbers closely to explain the sudden jump in gross domestic product (GDP) growth, positive and warning signs they throw up and what the future outlook is like.
Why did the Q1 GDP numbers throw a surprise?
Such a high growth rate was not expected. The Reserve Bank of India had projected only a 6.5% growth, and a poll of 22 economists by Mint indicated a 6.7% expansion of the economy in the first quarter.
The surprise was caused by low inflation, which gave a technical boost to the calculation of real GDP growth. To arrive at the real GDP growth, the nominal GDP is adjusted for inflation using a GDP deflator. Thanks to lower inflation, the GDP deflator was at a 23-quarter low of 0.9% in Q1 FY26, inflating the real GDP growth.
Will Q2 also benefit from the technical boost?
Yes. As long as inflation remains low, the benefit of the GDP deflator will continue. Also, the second quarter will benefit from a low base effect. The GDP growth in second quarter of FY25 was just 5.6%.
Also Read | RBI at fork in the road, experts back chasing headline inflation
What does this mean for FY26 GDP growth?
In FY25, India’s GDP is estimated to have grown by 6.5% compared to a heady 9.2% in FY24. Economists had projected a 6.5% growth in FY26 as well. But that growth came into question on the possible fallout of the high tariff imposed by the US.
Economists now feel that despite the 60-80 basis point impact due to the US tariffs, India’s GDP growth in FY26 will be at 6.5% levels. A lot will, however, depend on how the impact of the US tariffs plays out. After all, they affect many labour-intensive sectors such as textiles, gems and Jewellery, leather and so on.
Apart from a fall in exports, job losses or wage cuts could hurt consumption and smother the revival in private investment.
Are there any positive cues from the Q1 numbers?
The technical boost apart, the Q1 numbers do throw up some encouraging signs. Private consumption, it appears, is getting broad based on account of strong formal sector and rural wage growth.
Both central and state governments have front-loaded their capital expenditure. It grew by 33%. The low base effect is strong here as the government capex in Q1 of last year was impacted by the elections and declined by 31%.
Private capex, too, is improving if the index of industrial production (IIP) numbers are any indication. Apart from manufacturing, the services sector too is showing signs of strong growth.
What are the red flags the numbers throw?
The growth in nominal GDP (economic expansion before adjusting for inflation) has declined to 8.8% in Q1 of FY26 as against 9.6% in the same period last fiscal. This is a clear indication that there is still some slackness in the economy.
Credit growth remains weak, and tax collections are tepid. The topline of corporates is still sluggish. For these to change, consumption, though reviving, needs to gather pace. Only then will private investment revive.
The government's decision to reform and restructure the goods and services tax (GST) and lower the rates could help accelerate domestic consumption.
Also Read | Eight states want GST rate cuts to be linked to revenue guarantee
What are the implications of slower nominal GDP growth?
If the slowdown in nominal GDP growth continues, the government will not be able to meet its revenue collection targets. If economists are to be believed, as things stand today, twice the budgeted tax buoyancy is needed to meet the targets.
A slower nominal GDP growth will also force the government to tighten its belt and cut expenses. This is needed to maintain its fiscal deficit and debt levels as a share of GDP. A lower growth will also impact the credit offtake and revenues of India Inc.
Weeks before what is likely to be the Federal Reserve’s first interest-rate cut of the year, an unprecedented effort by President Trump to reshape the central bank is scrambling the dynamics on its policy committee.
In an Aug. 22 speech, Fed Chair Jerome Powell opened the door to a rate cut at the Fed’s Sept. 16–17 meeting to cushion a weaker labor market. While a quarter-point reduction from the current 4.25% to 4.5% target range still looks all but assured, the breadth of support for that cut among Fed officials, and what comes after, have been thrown into doubt.
This week, Trump moved to fire Fed governor Lisa Cook over allegations of mortgage fraud, the first time a president has tried to dismiss a governor in the central bank’s 111-year history.
Cook sued to block her removal, and initial arguments in Washington, D.C., federal district court Friday left it unclear whether Cook was still serving or would be able to vote at the September meeting.
The court fight over Cook’s position strains internal Fed unity. Cook named Powell a defendant in her suit because she wants a judge to rule that he can’t bar her from the Fed. Neither Powell nor the Fed has taken a position on the case. In court Friday, the Fed asked only that the judge, Jia Cobb, rule quickly, “to remove the existing cloud of uncertainty."
Interest rates are set by the Federal Open Market Committee, composed of a board of seven governors in Washington nominated by the president and confirmed by the Senate, and five presidents of the 12 regional reserve banks on a rotating basis.
Besides Cook, the governors consist of Powell and two Biden administration appointees who, like Cook, consistently vote with him, and two governors appointed by Trump in his first term, both of whom in July dissented in favor of a rate cut. Trump has nominated Stephen Miran, a close adviser who has also backed rate cuts, to an open seat on the board.
Miran’s confirmation hearing before the Senate Banking Committee is set for Thursday. If the full Senate confirms him quickly enough, he could join the Fed in time for the September meeting, meaning at least three Trump-aligned governors strongly backing the president’s demand for rate cuts.
If courts rule that Cook can be fired, Trump has told advisers he would move quickly to nominate her successor, which would give his appointees a four-to-three majority on the board. That confirmation would be difficult to accomplish before the September meeting, but Cook’s absence alone could leave the board evenly split between three Trump appointees, two Biden appointees and Powell.
While support for at least a quarter-point cut has built across the FOMC, there are skeptics on both sides. “Inflation remains too high, and therefore policy should remain modestly restrictive," Kansas City Fed President Jeffrey Schmid said in a speech earlier this month.
Meanwhile, some analysts anticipate that Michelle Bowman or Christopher Waller—both appointed by Trump—could press for a half-point cut. Waller, however, in a speech in Miami Thursday backed a quarter-point cut unless the economy weakens substantially.
“I would not be surprised if on an ongoing basis here, we get dissents quite regularly," said Matthew Luzzetti, Deutsche Bank’s chief U.S. economist.
High-profile dissents could sow confusion among investors trying to discern who will control the path of rates over coming months: Powell or the growing contingent of Trump appointees. Adding to the uncertainty, candidates to succeed Powell as Fed chair next May have been auditioning for the role in the media, calling for lower rates.
The pressure on the Fed from the White House and Cook’s case have put enormous weight on Powell, whose job is to forge consensus among FOMC members. During his tenure as chair, Fed officials have cast 661 policy votes, and only 18 have been dissents.
“Powell is going to be trying to keep the upcoming meetings as ringfenced as possible from all the pressures and questions floating around the Fed institutionally," said Krishna Guha, vice chairman at Evercore ISI.
Through July, most Fed officials were broadly hesitant to cut interest rates, though they assessed that rates were high enough to lean against economic growth. Their concern was that rapid economic-policy changes from the White House, including new tariffs and a broad immigration crackdown, could spark a return of the inflation that haunted the economy during the early 2020s.
At the Fed’s annual Jackson Hole conference, Powell said his perception of the risks has shifted. Unemployment has stayed modest, but after seismic downward revisions to job creation landed in early August, the labor market now appears weaker, in “a curious kind of balance that results from a marked slowing in both the supply of, and demand for, workers," Powell said.
Further risks to the labor market help make the case for a coming rate adjustment, Powell said. Before its September meeting, the Fed will get one more look at official employment data in the monthly jobs report for August to be released Friday.
Write to Matt Grossman at matt.grossman@wsj.com
GREENSBORO, N.C.—How much should a copper bathtub cost? Clifford Thompson is trying to figure that out.
Until now, the hand-hammered tubs his family-owned business imports from India have carried a suggested retail price of about $3,300. President Trump’s 50% tariff on copper imports and steep levies on goods from India are forcing Thompson Traders to rethink that price, but settling on a new one isn’t easy.
Just this week, the levies on Indian goods doubled to 50%—days before an appeals court late Friday struck down the legal basis for at least part of those tariffs, a ruling likely heading for Supreme Court review. The North Carolina company’s negotiations with big-box retailers over even small price increases are maddeningly slow. And Thompson, the company’s president, isn’t certain what inflation-weary consumers will accept—or how much competitors plan to charge.
“Everyone is struggling to figure out what to do, what’s the right decision, where do we set prices," Thompson said from the warehouse offices of the 30-person company founded by his mother, Alejandra Ochoa de Thompson.
The impact of tariffs has been a question hanging over the economy. So far, the global trade war hasn’t caused a surge in prices. That is in large part because companies have absorbed price increases, though that might not last. Pretariff inventories are running low, forcing companies to confront difficult pricing decisions they can no longer delay.
Federal Reserve Chair Jerome Powell said last week that tariffs’ effects on consumer prices “are now clearly visible" in some categories of goods, and are expected to accumulate in the months ahead. In a recent Richmond Fed survey, about 38% of businesses reported being only slightly certain or not at all certain about the prices they will charge for the rest of the year. Nearly 60% were either slightly certain or not at all certain about the costs of materials for the remainder of the year.
Thompson Traders says its pricing limbo can’t last forever because it can’t absorb a double-digit import tax on so many goods. If it can’t raise enough prices by year-end, it might need to take drastic steps to reduce costs, including slashing marketing and executive pay, Clifford Thompson said.
Repricing, though, isn’t as easy as changing a tag—in part because suppliers and big-box stores are engaged in an epic tussle over who will pay what.
Retailers, including Lowe’s and Home Depot, buy Thompson Traders’ wares and set the retail price themselves. And they have been reluctant to pay Thompson Traders more.
Back in May, the company submitted a request asking Lowe’s to pay 4% to 5% more for a range of kitchen sinks manufactured in Turkey, which had just been hit with an extra 10% import tariff. The fireclay ceramic sinks have generally retailed for $249 to $499, depending on size.
Chris DeVillers, who handles Thompson’s negotiations with big retailers, filled out a worksheet documenting the product cost, duties and freight costs, to justify his requested new price.
By July, he was still awaiting a decision, so he nudged the retailer. Then, in late July, Trump hiked the tariff on Turkish goods to 15%.
Lowe’s, which declined to comment, last week finally agreed to a 4% to 5% increase on some sinks, but not all, DeVillers said. He hasn’t gone back to ask for more in the wake of the increased tariff, in part because he is not sure that 15% is the final levy. Thompson Traders may “have to eat it," he said. “I’m not sure."
Thompson Traders says Home Depot has agreed to price increases on some items but not all. The company hasn’t approached the retailer again about the increased tariff on Turkey.
Thompson Traders has struggled to get big-box retailers to pay more for its kitchen sinks, which now carry higher import tariffs.Ajuwa Bahizire labels boxes at the Thompson Traders warehouse, where the company is running low on its pretariff inventory.
Home Depot said it couldn’t comment on specific suppliers, but pointed to comments that its executive vice president of merchandising, Billy Bastek, made on an earnings call this month. Bastek said higher tariffs mean there will be “modest price movement in some categories," but that the company is “laser-focused" on protecting its customers’ costs.
Clifford Thompson said he understands retailers are “in a very tight spot as well," concerned that price-hike requests from thousands of suppliers could fuel further inflation and sap consumer demand. So his company is trying to limit how many times it returns to the big-box stores with new requests, even as tariffs change week to week, he added. “We cannot go back two weeks later and say, ‘Oh, sorry, now it has to be this price.’ They just don’t work that way."
The company is worried the steep tariffs on copper may force it to stop selling some items, including a copper sink that retails for $450 at big-box stores. DeVillers hasn’t settled on a new price but thinks it might have to be as much as $800 if tariffs stay the same, likely making the sink too expensive for the retailers.
Pricing uncertainty prompted the company this month to ask its Indian factory to halt shipment of 50 copper tubs that had already been boxed up for delivery.
Decisions on pricing are also complicated by a lack of clarity on how the tariffs are being applied.
Alejandra Thompson de Jordan, Clifford’s sister and head of marketing for the company’s higher-end products—many of which are made in Mexico—spent days analyzing the market and compiling a new price list for the copper and brass sinks, range hoods and other items she oversees. She was ready to send it to her retail and interior-design customers a few weeks ago when her other brother, J.J. Thompson, called to say the company’s assumptions about the copper tariff might be wrong.
DeVillers had spent half the night reading U.S. Customs and Border Protection documents and now believed that CBP was levying the 50% copper and brass tariff on the value of the raw materials used in a product—not on the value of the finished item. That meant their tariff costs might be lower than they originally expected and her new prices therefore too high, Thompson de Jordan said.
But when Devillers and J.J. Thompson called three different customs brokers to check whether their new conclusion was correct, they got three different answers.
“I still haven’t sent it," Thompson de Jordan said of her price list. “I have anxiety about it right now."
For some items, including copper tubs, Thompson Traders is researching the market before it asks retailers for an increase to ensure it is not out of sync with competitors. It is scouring rivals’ online pricing and canvassing sales representatives and kitchen-and-bath showrooms for feedback on possible price changes.
Thompson Traders has considered producing items domestically but says the hurdles are too high. The company sources many of its hand-hammered copper and brass items from a town in Mexico where artisans have been coppersmithing since the Middle Ages, Clifford Thompson said.
Attempting to re-create that in the U.S. would require an investment that the small business can’t afford, he said.
Tariff-related questions still hang over several of the countries that supply Thompson Traders. Trump’s negotiations with Mexico on a potential trade deal continue, which could change levies on imports from that country. Trump also hasn’t reached a deal with China, from which Thompson Traders imports sink drains. And the company doesn’t rule out changes to tariffs on India, Turkey and other nations.
“If people think that tariffs are what’s the best thing for the country, [then] we’re OK with the tariffs," said Clifford Thompson.
“What we would really love is just some clarity around it…so we can say, ‘OK, here’s what the price is,’ and we can move on."
Write to Jeanne Whalen at Jeanne.Whalen@wsj.com