India's Real GDP growth in the first half of FY15/16 (i.e Apr-Sep15) averaged 7.2%, marginally slower than 7.6% in 1H year before. Comparatively nominal growth was down more sharply to 7.4% from 13.5% 1H last year. In the Sep15 quarter particularly nominal GDP growth slipped below real GDP. 

What gives? A large part of the slowdown in nominal growth is driven by easing inflation. The price measure i.e. GDP deflator in the first half of FY15/16 slowed significantly to 0.2% from 5.9% same period last year. On gross-value added basis (GVA), the fall in the GDP deflator was starker at -1.1% from 5.8% in the same time frame. 

While this is worrisome, observers including the Reserve Bank of India have expressed doubts on this count. The sharp fall-off in these deflators suggest that the WPI index assumes a higher weightage in this index rather than the key policy barometer, CPI inflation. At the same time, sectoral deflators are also been questioned. Industry and service sector deflators extended their decline to -2.3% (vs Jun quarter's -1.1%) and -2.7% (vs Jun quarter's -0.5%) respectively. 

This is further compounded by the fact that the WPI inflation basket does even not include services. Hence, deflating services GDP by the WPI inflation gauge is erroneous and technically understating the nominal GDP growth pace (or overstating real growth). This discrepancy is likely to spur calls to use retail inflation as a preferred gauge to deflate growth rather than the wholesale price indices. 

Easing nominal GDP growth is worrisome as this puts pressure on the economy's fiscal metrics and external balances while hurting domestic corporate profitability. 

"A slowdown in the nominal growth (vs budgeted 11.5%) this year might necessitate an additional 0.2% of GDP worth savings to keep within the -3.9% fiscal target", says DBS Group Research.

Into FY16/17, there are already concerns that the scheduled 0.4% of GDP fiscal consolidation might be delayed. A miss larger than -0.2-0.3% of GDP is likely to infuse caution. Rating agencies will monitor these developments closely, especially close to the heels of the unproductive winter parliamentary session and failure to push through the GST/ other key bills. A miss on the fiscal targets will also narrow scope for additional rate cuts. In wake of last year's progressive and capex-oriented budget, the RBI had lowered rates in early-Mar15. This time around, a significant miss on deficit targets is unlikely to see the RBI respond with further monetary stimulus.