In recent years, India has navigated a subtle macroeconomic challenge: persistently low inflation that has tempered nominal GDP growth. Nominal GDP, the sum of real economic expansion and inflation, serves as a critical barometer for fiscal health, tax revenues, and corporate earnings. When inflation is understated, nominal GDP lags, straining government budgets and business profitability. Recognizing this, the Indian government introduced a revised Consumer Price Index (CPI) series in February 2026, shifting the base year to 2024 from 2012. Informed by the 2023-24 Household Consumption Expenditure Survey (HCES), this update refines inflation measurement to align with modern consumption patterns, potentially elevating reported inflation and boosting nominal GDP.
Flaws in the Old CPI and the Need for Change
The outdated 2012-based CPI no longer captures India’s evolving economy. With rapid urbanization, digital adoption, and rising incomes, household spending has shifted from basics to services and durables. Yet, the old index overweighted food and beverages at 45.9%, making it vulnerable to agricultural shocks like monsoons or supply disruptions. This emphasis often understated inflation in underrepresented areas: services (education, healthcare), housing, and digital items like streaming subscriptions.
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Price collection was limited—1,181 rural and 1,114 urban markets—with infrequent updates, missing online transactions and semi-urban nuances. Consequently, inflation appeared lower than reality, distorting policy. The Reserve Bank of India (RBI) might cut rates prematurely, risking bubbles, while fiscal planning suffered from sluggish nominal GDP growth. Tax collections faltered, debt ratios worsened, and corporations saw muted revenue increases, curbing investments.
This misalignment exacerbated broader issues. Low nominal GDP—hovering at 9-11% despite 6-7% real growth—limited government spending on infrastructure and welfare, while businesses grappled with subdued profits. Updating the CPI addresses this by providing a truer inflation lens, ensuring data reflects contemporary realities.
Key Changes in the New CPI Series
The revised CPI expands to 358 items (308 goods, 50 services), categorized under 12 divisions per the 2018 Classification of Individual Consumption According to Purpose (COICOP). Food’s weight drops to 36.8%, a 9.1-point reduction, acknowledging declining food budget shares with rising prosperity. Housing rises to 17.7% from 16.9%, including rural rents via Census 2011 data. Services like education and health gain prominence.
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Modern additions include AirPods, hand sanitizers, OTT platforms (e.g., Netflix), air purifiers, e-commerce, and international airfares. Obsolete items—VCRs, radios, CD/DVDs, horse-cart fares—are removed. Market coverage broadens to 1,465 rural villages and 1,407 urban areas, incorporating online prices collected in real-time via digital tools. Base prices from January to December 2024 ensure timeliness.
Developed by an Expert Group with RBI and academic input, the series debuted with January 2026 inflation at 2.75%—slightly higher but within the RBI’s 2-6% target. This accuracy reduces volatility from food swings, offering stable, representative inflation data.
Impact on Inflation and Nominal GDP
The update may initially show marginally higher inflation (0.5-1 points) by capturing service and housing price rises, not creating inflation but measuring it realistically. This recalibration directly uplifts nominal GDP, expressed as Real GDP × Price Deflator. Previously understated inflation kept nominal growth subdued; now, with accurate figures, it could rise to 10% in 2026 from 9.2% in 2025, without altering real output.
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Higher nominal GDP enhances tax buoyancy—GST, income, and excise revenues scale with nominal incomes—easing fiscal deficits and improving debt sustainability (current ratio ~82%). It provides policy headroom for investments, fostering macro stability. For businesses, it means healthier revenues, encouraging capex and jobs.
While comparable to the old series (~98%), transitions may spark debates on revisions. Critics note reduced food weights might overlook rural pressures, but broader inclusions promote equity. Future base revisions every 3-5 years will keep metrics agile amid digital and urban shifts.
Why High Nominal GDP Boosts Stock Markets
Elevated nominal GDP propels equity markets by inflating corporate earnings and investor confidence. Stock valuations hinge on EPS growth; higher nominals amplify revenues via price and wage increases, justifying premium P/E ratios. Historically, 10-12% nominal GDP correlates with mid-teen returns on Nifty 50 and Sensex. Sectors like consumer goods, financials, and IT thrive on nominal demand surges.
It also stabilizes markets by bolstering fiscal health, averting austerity, and enabling reforms like GST tweaks or RBI rate cuts in controlled inflation. Reduced volatility from accurate data supports bull runs; in dollar terms, strong nominals enhance global appeal. Projections tie 2026 earnings growth to 10% nominal expansion, fueling rallies.
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Impact on Foreign Institutional Investors (FIIs) Flows
FIIs, injecting billions annually (~$30B in peaks), favor high nominal GDP as it signals dynamism. It boosts earnings outlooks, turning valuations attractive and drawing inflows that amplify gains. Studies link GDP-FII-market positivity.
Nominal growth strengthens the rupee, cutting currency risk and enhancing dollar returns. It reassures on resilience, supporting policies that boost confidence. Upgrades like Morgan Stanley’s Sensex 1 lakh target hinge on this narrative. Despite short-term outflows from global factors, India’s 7-8% real growth (pushing nominal to 10-12%) sustains FII interest.
Caveats include inflow volatility potentially unsettling retail investors. If inflation-driven, it might erode real returns, but the CPI revision mitigates this by ensuring accuracy.
The CPI overhaul isn’t cosmetic—it’s essential for honest measurement. By elevating nominal GDP, it fortifies fiscal metrics, corporate vitality, and market allure, especially for FIIs. As India targets $5 trillion status, accurate data harmonizes growth, inflation, and policy, illuminating paths to sustainable prosperity. (You can reach out to the author at srinivasbg@invictusfinserv.com)
