Growth paradox: Why India’s 8% growth isn’t translating into higher incomes or investor confidence

India may be posting one of the fastest growth rates among major economies, but a closer look at the Reserve Bank of India’s December Bulletin reveals a more nuanced — and in some areas troubling — picture beneath the headline numbers. 

According to Trinh Nguyen, Senior Economist at Natixis, the disconnect between real and nominal growth is the central theme emerging from the RBI’s latest high-frequency data. While India recorded a robust 8.2% year-on-year real GDP growth, nominal GDP growth slowed sharply to 8.7%, pointing to weaker pricing power across the economy. 

“High-frequency indicators are not good,” Nguyen noted in a series of posts analysing the bulletin. Slowing GST revenue growth, negative electricity demand, and soft petroleum consumption together suggest that aggregate demand and pricing momentum remain under pressure, despite strong real output expansion. 

Nominal growth weakness  

The RBI’s high-frequency indicators reinforce this concern. GST revenue growth decelerated sharply, slipping into low single digits in recent months, even as e-way bill generation and toll collections showed mixed signals. Electricity demand turned negative in October and November, while petroleum consumption remained uneven, reflecting weak industrial and transport fuel demand. 

Nguyen argues that this matters because nominal growth — not just real GDP — drives government revenues, corporate earnings and household incomes. “What we got is rather weak nominal outcomes irrespective of strong real GDP growth,” she said, warning that subdued GST collections could force the government to increase its financing needs, potentially leading to higher borrowing. 

Auto shines as a rare bright spot 

Amid the broader softness, one sector stands out: automobiles. High-frequency demand indicators show a clear improvement in two-wheeler, passenger vehicle and tractor sales, particularly in recent months. Nguyen attributes part of this momentum to GST reductions, which have boosted affordability. 

“If you want to see some positive demand indicator, you will find it in autos and two-wheelers,” she noted, adding that India is currently one of the few bright spots in Asia’s auto market, alongside China — though Chinese auto profits remain under pressure due to price competition. 

Rural indicators echo this trend. MGNREGA work demand has fallen sharply, which Nguyen interprets as a positive signal. Since the scheme acts as a fallback for rural distress, declining demand suggests fewer households are relying on government-provided stopgap employment. 

Employment improving, but informality persists 

Employment data paint a mixed picture. While overall labour market conditions remain highly informal, trends are gradually improving. The PMI employment indices for both manufacturing and services stayed above the 50-mark, signalling expansion, though manufacturing employment has begun to lose momentum. 

Urban unemployment rates remained higher than rural levels, while falling MGNREGA demand reinforced signs of reduced rural stress. Still, Nguyen cautioned that industrial production may be slowing, with weak electricity and fuel consumption partly blamed on the early onset of winter but possibly reflecting deeper demand issues. 

Exports, services and the INR drag sentiment 

External demand remains another weak link. Nguyen pointed to slowing service exports, compounding softness in merchandise shipments. Together, these trends are limiting export income growth — a key factor behind the Indian rupee’s persistent weakness. 

“Exporters are not in a hurry to sell dollars,” Nguyen observed, while foreign investors remain cautious amid expectations of further INR depreciation. Despite attractive real yields in India, currency losses wiped out returns for European investors, with India-focused portfolios delivering negative returns in euro terms last year. 

Capital flows disappoint 

Capital inflows have failed to offset these pressures. RBI data show that net FDI flows have turned negative or near-neutral in 2025, driven by elevated repatriation, disinvestment and outward FDI. Nguyen argued that India should ideally be attracting net FDI inflows of at least 2% of GDP, making the current trend notable. 

Portfolio flows have also weakened. Foreign portfolio investment turned negative in December, reflecting concerns over earnings, nominal GDP growth and currency depreciation. “Even if growth is epic, earnings and nominal GDP matter,” Nguyen said, explaining why global investors remain cautious. 

A silver lining in competitiveness 

One positive development is the rupee’s movement on a real effective exchange rate (REER) basis. The RBI’s data show that India’s REER has depreciated meaningfully, improving trade competitiveness after years of overvaluation. 

“That’s good news from a competitiveness perspective,” Nguyen said, calling it a potential silver lining if global demand conditions stabilise. 

Taken together, the RBI’s December Bulletin suggests an economy growing fast in real terms but struggling with weak prices, slowing exports and fragile investor sentiment. Autos, transport vehicles and steel — buoyed by infrastructure activity — remain bright spots, while manufacturing momentum, capital inflows and nominal growth lag behind. 

As Nguyen summed it up: India ended 2025 with strong growth, but weak nominal dynamics and softer export income are weighing on the rupee and investor appetite.