Do it yourself

Here the minister is telling the truth (70000 employment letters given), without answering the question. He did not even clarify whether these 70000 youth have actually been given jobs or just been promised a job in the future. In this way, the minister lied by telling a plain truth- manipulated it to suit his convenience.

A similar pattern often plays out in economic statistics, where data may be technically correct but presented in a way that conveys a misleadingly optimistic picture.

The blockbuster GDP data for 1QFY26, released by the National Statistics Office (NSO) last Friday, prima facie appears an example of manipulated truth. According to NSO, the Indian economy recorded real GDP growth of 7.8% in 1QFY26, over and above 7.4% recorded in 4QFY25. The reported growth rate is far above the estimates of RBI and the professional forecasters.

Key highlights of GDP Data for 1QFY26

Basic data

Real GDP Growth:  7.8% in 1QFY26, compared to 7.4% in 4QFY25 and 6.5% in 1QFY25.

GDP at Constant Prices Rs. 47.89 lakh crore in 1QFY26, up from Rs. 44.42 lakh crore in 1QFY25.

Nominal GDP Growth: 8.8% in 1QFY26, compared to 9.8% in 4QFY25 and 9.7% in 1QFY25.

Nominal GDP in Q1FY26 is estimated at ₹86.05 lakh crore (US$975bn at today’s exchange rate), against ₹79.08 lakh crore (US$943bn at 1^st September 2024 exchange rate) in 1QFY25.

Real GVA Growth: 7.6% in 1QFY26, compared to 6.4% in 4QFY25 and 6.5% in 1QFY25. Real GVA was Rs. 44.64 lakh crore in 1QFY26, compared to Rs. 41.47 lakh crore in 1QFY25

Demand side performance

Private consumption demand slows: Private Final Consumption Expenditure (PFCE) grew by 7.0% in 1QFY26, compared to 7.6% in 4QFY25 and 8.3% in 1QFY25.

Investment demand strong: Gross Fixed Capital Formation (GFCF) grew by 7.8% in 1QFY26, compared to 7.3% in 4QFY25 and 6.7% in 1QFY25.

Government consumption rises: Government Final Consumption Expenditure (GFCE) grew by 9.7% in 1QFY26 (nominal terms), compared to 4.4% in 4QFY25 and 4.0% in 1QFY25.

Notably, 1QFY25 was election quarter and the model code of conduct was in effect for much of the period.

Supply side performance

Services: GVA up 9.3% in 1QFY26, from 6.8% in both 4QFY25 and 1QFY25. Boosted by exports, financial services, government spending, and the digital economy.

Construction: GVA up 7.6% (vs. 8.6% in 4QFY25, 7.0% in 1QFY25), supported by infrastructure investment but moderated by seasonal factors.

Manufacturing: GVA up 7.7% (vs. 3.5% in 4QFY25, 2.2% in 1QFY25). Recovery driven by domestic demand, production-linked incentives, and improved export orders (HSBC PMI at 58.4 in June 2025). Low base effect also helped.

Agriculture: GVA up 3.7% (vs. 3.8% in 4QFY25, 1.5% in 1QFY25). Better Kharif sowing conditions supported growth despite a 5.6% monsoon deficit in 2024.

Mining & Quarrying: GVA down -3.1% (vs. +1.4% in 4QFY25, -0.01% in 1QFY25), hurt by weak global demand and domestic bottlenecks.

Utilities: GVA up just 0.5% (vs. 3.0% in 4QFY25, 10.5% in 1QFY25), reflecting weaker energy demand and delays in renewable project

Material divergence from expectation

The 7.8% real GDP growth in 1QFY26, driven by services (9.3%), manufacturing (7.7%), construction (7.6%), and agriculture (3.7%), was well above RBI and analyst estimates of 6.5–7.0%. Weakness in mining and utilities moderated the overall picture, but the outcome still exceeded consensus by 0.8–1.3 percentage points.

Apparent reasons for divergence

Manufacturing rebound: Analysts expected ~5%, but the sector delivered 7.7%.

Government spending: GFCE grew 9.7%, far above expectations of modest increases.

Agriculture: Growth of 3.7% (vs. ~2.5–3.0% expected), though actual yields may revise this down later.

Services: Tertiary sector expanded 9.3% (vs. ~7.0% expected), on strong exports and financial services.

The true lie

In my view, the base effect, discrepancies in data collection that are corrected later through revision of data are regular factors and should not raise doubt about the integrity of the GDP data.

However, what stands out in this quarter’s data is GDP deflator – the inflation factor used to convert nominal GDP into real GDP.

·         In 1QFY26, the deflator was just 0.9%, compared to 3.1% in 4QFY25.

·         The low deflator boosted real GDP growth by roughly 2 percentage points versus what it would have been with a 3.1% deflator.

·         Real GDP growth (7.8%) thus appears unusually strong, even though nominal GDP growth slowed both year-on-year and quarter-on-quarter.

This matters because corporate profits, tax collections, private consumption, and the current account deficit (CAD) all track nominal GDP, not real GDP. Slower nominal growth implies weaker profits, lower revenues, softer consumption, and a higher CAD ratio.

It is therefore unsurprising that financial markets have shown little enthusiasm for the GDP “surprise.” Government bond yields have edged back to pre-budget levels (despite a 50bps repo rate cut), and the INR has slipped to its lowest ever level.

Yes, 1QFY26 real GDP growth is surprisingly high—but it would be misleading to present it as evidence of a booming economy. Beneath the headline number, the economy still faces strong headwinds: new US tariffs, climate catastrophes in Punjab, J&K, Himachal Pradesh, and Haryana, and a steady erosion of foreign investor confidence (reflected in weak FDI and negative FPI flows).

Besides, the 1QFY26 season reflects a patchy recovery. Select large-cap and government-driven sectors (infrastructure, defense and PLI beneficiaries) have reported decent numbers and growth, while several small and midcap, IT, consumer and media companies have reported below expectation results.

In their post results commentary, the management of IT and consumer companies in particular, have highlighted global and macro challenges they are facing, sounding cautious about near-term growth.

Banking & Financial Services and IT Services are the most critical sectors for the overall market performance, as these sectors have almost 42% of weightage in the benchmark Nifty50. Banking & Financial services alone account for about 28% weightage in the Nifty50. While the performance of the IT Services Sector is significantly influenced by global factors, banking and financial services are primarily driven by the domestic economic and market conditions. Conversely, the performance of the banking & financial sector is a strong indicator of the state of the Indian economy.

Results of the banking & financial services companies and the related management commentary indicate a challenging time for the sector. While growth in the reported profits has been decent, provisions for NPAs have seen sharp acceleration. Pressure on revenue growth and margins is also visible. The commentary on the near-term growth prospects has also been heavily guarded.

In particular the following points have been noteworthy:

·         The deposit growth is slowing down. 1QFY26 deposit growth for banks is about 10% compared to 11% in the corresponding quarter last year. Notably, the deceleration in time deposits has been much sharper (9% vs 12%) whereas demand deposits have increased significantly (18% vs 6%). This datapoint could be interpreted in multiple ways. But a simpler explanation is that (i) depositors are more uncertain about their spending/investment plans; (ii) Banks have significantly lower pool available for project or long-term lending; and (iii) despite higher system liquidity, money multiplier remains poor. This is reflected in poor credit growth of 9.5% in 1QFY26 (vs 17.4% in 1QFY25), lower than the deposit growth.

·         Almost all sectors have shown a slowdown in credit offtake. Farm sector (7.5% vs 21.6%), Industry (4.8% vs 9.4%), Services (8.7% vs 23.2%) and Personal loans (11.1% vs 28.7%). Some part of the slowdown could be attributed to the high base effect, but a large part could be stress (farm sector), regulatory checks (NBFCs and personal loans) and lack of demand (industry).

Sector critical for growth acceleration, e.g., infrastructure, cement, power, steel, chemicals etc. witnessed marked slowdown. Sectors benefiting from government incentives (PLI), especially electronic manufacturing, witnessed strong growth, raising questions about the sustainability of the growth (see here).

A recent comment of the finance minister about the reluctance of the corporate sector to invest surplus cash may be seen in this context.

Corporates may be reluctant to add fresh capacities due to (a) poor demand growth outlook; (b) highly uncertain policy climate (local as well as global); and (c) stricter lending standards and elevated equity market valuations, prompting promoters to raise fresh funds through equity rather than debt.

In my view, India’s banking sector is presently facing multiple challenges. From investors’ viewpoint the outlook can be summarized as follows:

·         Asset quality has peaked, little scope for further improvement, recoveries of written off debt is no longer material enough to move the needle.

·         The rate cycle has turned down. Loans are getting repriced instantly (about 60% loans are linked to repo) while deposit repricing may take longer. Margins may stay lower in the short term.

·         No immediate trigger for sharp acceleration in credit growth.

In simpler terms, overall banking sector may not outperform the benchmark in the near term.