## CAN INDIA SUSTAIN ITS RISE?

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### Goldilocks narrative: recent achievements and emerging headwinds
- Postpandemic era achieved a "rare trifecta": high growth, fiscal consolidation, and macroeconomic stability.
- Annual real GDP growth averaged roughly 7 percent.
- Consumer price inflation was "anchored near the 5 percent mark"—within the Reserve Bank of India’s target band.
- Banking sector improvements:
  - Gross nonperforming assets plummeted from a peak of more than 11 percent to a multiyear low of less than 3 percent.
  - Corporate leverage dropped significantly, restoring profitability.
- Government executed an ambitious infrastructure drive; capital expenditure as a share of GDP expanded rapidly across roads, railways, and logistics.
- Digital public infrastructure successes: Aadhaar, the Unified Payments Interface, and Direct Benefit Transfer.
- Recent external shock: a steep rise in oil prices triggered by conflict in the Middle East has:
  - Exposed structural energy vulnerabilities.
  - Cooled growth momentum.
  - Reemerged inflationary pressures.
  - Put persistent downward pressure on the rupee.
  - Weakened the external sector via capital outflows.
- India slipped from fifth to sixth place in the global GDP ranking.

### Structural vulnerabilities — three main concerns
- Missing private investment
  - Overall investment rate has hovered around 33 percent of GDP.
  - Private corporate investment remains stuck at about 11 percent of GDP, compared with a historical peak of nearly 17 percent in 2008.
  - Current investment is concentrated in a handful of large groups and sectors: renewable energy projects, telecommunications services, data centers, electronics assembly projects, and sectors benefiting from government incentives.
  - Paradox: corporate cash reserves are high and bank balance sheets are primed to lend, yet broader corporate boardrooms remain cautious due to uncertainty about future demand, expected returns, and regulatory friction.
  - Conclusion: Without a robust private investment cycle, sustaining growth rates above 7 percent over the next decade will be an uphill battle.

- Jobs and productivity mismatch
  - Sectoral shares:
    - Agriculture contributes just about 15 percent of GDP but accounts for nearly half the total workforce.
    - Manufacturing is responsible for about 13 percent of GDP and absorbs only about 11 percent of workers.
    - High-value modern sector (IT, finance, business services) generates roughly 15 percent of GDP while directly employing a minuscule 3 percent of the workforce.
  - India exhibits one of the highest productivity gaps between agriculture and the rest of the economy.
  - Manufacturing remains stagnant relative to potential; yet manufacturing is singled out as the only sector capable of absorbing labor at the required scale.
  - Trade context: India has over $100 billion in annual imports from China—partial substitution through domestic production could generate millions of jobs.
  - Global demand for labor-intensive goods remains strong; modest export share gains could expand output and employment if firms scale up and integrate into global value chains.

- Fragmented market and K-shaped divergence
  - Growth concentrated in capital- and skill-intensive sectors has produced uneven distribution of wealth:
    - Formal urban economy thriving: more than a hundred "unicorns" (tech start-ups valued at more than a billion dollars each), historic highs in financial markets, booming luxury consumption.
    - Large portion of population faces stagnant realities: real rural wage growth flat or negative when adjusted for persistent food inflation; over 85 percent of the workforce is in informal employment without social security benefits or predictable income.
  - Resulting K-shaped cleavage caps domestic market size and acts as a structural bottleneck to consumption-led private investment.

### Innovation deficit and demographic challenges
- R&D spending and innovation
  - Total spending on R&D remains stuck at roughly 0.7 percent of GDP.
  - Advanced innovation economies routinely spend 3 percent of GDP or more.
  - India is a prolific user but a marginal producer of core intellectual property in semiconductors, artificial intelligence, biotech, and advanced manufacturing.
- Demographics
  - Median age of roughly 28 (compared with nearly 40 in China and over 44 in Europe) creates a historic demographic window.
  - The demographic dividend is not inevitable and must be earned via education and upskilling; otherwise, it could become a demographic liability.
  - Urgent race between job creation and labor-force growth.

### Unleashing potential — policy priorities and the true metric of success
- The "true metric of success" over the next decade is structural translation: converting macroeconomic growth into
  - a self-sustaining private investment cycle,
  - abundant formal jobs,
  - domestic technological sovereignty, and
  - a broad-based rise in household incomes.
- Three policy priorities:
  - Revive private investment through a more predictable regulatory environment, lower compliance burdens, and conditions that raise expectations for returns on long-term capital.
  - Accelerate the shift of labor from low-productivity agriculture to labor-intensive manufacturing and modern services via investment in skills, logistics, and urban infrastructure.
  - Reorient limited fiscal resources to increasingly prioritize human capital—including education, health, and R&D—alongside physical infrastructure.
- Assessment: India demonstrated that rapid growth can coexist with macroeconomic stability; the next phase—ensuring growth is structurally deep, inclusive, and innovation driven—is significantly more challenging.

*duvvuri subbarao is an economist and was governor of the Reserve Bank of India from 2008 to 2013.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/09/subbarao.pdf_