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

India may be recording 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 worrying – picture beneath the headline numbers.

According to Trinh Nguyen, chief economist at Natixis, the disconnect between real and nominal growth is the main theme emerging from the latest high-frequency data released by the Reserve Bank of India. While India recorded strong real GDP growth of 8.2% year-on-year, nominal GDP growth slowed sharply to 8.7%, indicating weak pricing power across various sectors of the economy.

“High-frequency indicators are not good,” Nguyen noted in a series of posts analyzing the prospectus. Slowing GST revenue growth, negative electricity demand and light oil consumption together indicate that aggregate demand and pricing momentum remain under pressure, despite the strong expansion in real production.

Poor nominal growth

High-frequency indicators issued by the Reserve Bank of India reinforce this fear. GST revenue growth has slowed sharply, falling to low single digits in recent months, even as mixed signals have emerged over e-way billing and toll collection. Electricity demand turned negative in October and November, while oil consumption remained uneven, reflecting weak demand for industrial and transportation fuels.

Nguyen says this is important because nominal growth — not just real GDP — drives government revenues, corporate profits and household incomes. “What we get is fairly weak nominal results regardless of strong real GDP growth,” she said, warning that weak GST collections could force the government to increase its financing needs, which could lead to higher borrowing.

Illuminates cars as a rare bright spot

Amid this broader weakness, one sector stands out: automobiles. High-frequency demand indicators show a clear improvement in sales of two-wheelers, passenger vehicles and tractors, especially in recent months. Nguyen attributes part of this momentum to the GST cuts, which have boosted affordability.

“If you want to see some positive demand indicators, you’ll find it in cars and two-wheelers,” she noted, adding that India is currently one of the few bright spots in Asia’s auto market, along with China – although Chinese auto profits remain under pressure due to price competition.

Rural indicators reflect this trend. Demand for MGNREGA work has fallen sharply, which Nguyen interprets as a positive sign. Since this scheme acts as an alternative to rural distress, lower demand indicates that fewer families depend on temporary employment opportunities provided by the government.

Employment is improving, but informal activity persists

Employment data paints a mixed picture. While general labor market conditions remain largely informal, trends are gradually improving. PMI employment indices for both the manufacturing and services sectors remained above 50, indicating expansion, although employment in the manufacturing sector is starting to lose momentum.

Unemployment rates in urban areas remained higher than in rural areas, while falling demand for MGNREGA reinforced signs of easing stress in rural areas. However, Nguyen warned that industrial production could slow, with weak electricity and fuel consumption partly attributable to the onset of winter but perhaps reflecting deeper demand issues.

Exports, services and INR drag sentiment

External demand remains another weak link. Nguyen pointed to a slowdown in services exports, which exacerbated weakness in merchandise shipments. Together, these trends are limiting export income growth, which is the main factor behind the continued weakness of the Indian rupee.

“Exporters are in no hurry to sell dollars,” Nguyen noted, while foreign investors remain cautious amid expectations of further depreciation of the Indian rupee. Despite attractive real returns in India, currency losses have eaten into returns for European investors, with India-focused portfolios achieving negative returns in euros last year.

Capital flows are disappointing

Capital flows have failed to offset these pressures. Reserve Bank of India data show that net FDI inflows turned negative or nearly neutral in 2025, driven by rising repatriation, disinvestment and OFDI. Nguyen claimed that India should ideally attract net FDI inflows of at least 2% of GDP, making the current trend notable.

Investment portfolio flows also weakened. Foreign portfolio investments turned negative in December, reflecting concerns about earnings, nominal GDP growth and currency depreciation. “Even if growth is epic, profits and nominal GDP are important,” Nguyen said, explaining why global investors remain cautious.

The silver lining is in competitiveness

One positive development is the movement of the rupee based on the real effective exchange rate (REER). Reserve Bank of India data shows that India’s real real exchange rate has depreciated significantly, improving trade competitiveness after years of overvaluation.

“This is good news from a competitiveness perspective,” Nguyen said, describing it as a potential glimmer of hope if global demand conditions stabilize.

Taken together, the Reserve Bank of India’s December bulletin suggests that the economy is growing rapidly in real terms but is suffering from weak prices, sluggish exports and fragile investor sentiment. Cars, transportation vehicles and steel – supported by infrastructure activity – remain bright spots, while manufacturing momentum, capital flows and nominal growth lag.

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