## Can India Sustain Its Rise?

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## Bibliographic details
- Authors: DUVVURI SUBBARAO
- Published: September 1, 2026

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### Overview
- Recent shift from a celebratory macroeconomic narrative to mounting structural concerns after a steep rise in oil prices linked to conflict in the Middle East.
- Short-term headwinds: growth momentum cooling, inflationary pressures reemerging, rupee under persistent downward pressure, capital outflows, stalled private investment, and a slip to sixth place in the global GDP ranking.
- Strategic context: India is the world’s most populous nation, with a median age of roughly 28, and remains uniquely positioned to capture global manufacturing realignment under the China+1 dynamic.

### Goldilocks narrative: achievements and limits
- Postpandemic trifecta: high growth, fiscal consolidation, and macroeconomic stability.
- Annual real GDP growth averaged roughly 7 percent.
- Consumer price inflation anchored near the 5 percent mark—within the Reserve Bank of India’s target band despite global supply shocks.
- Banking-sector repair: gross nonperforming assets fell from a peak of more than 11 percent to a multiyear low of less than 3 percent; corporate leverage dropped significantly.
- Infrastructure drive: capital expenditure as a share of GDP expanded rapidly across roads, railways, and logistics networks.
- Digital public infrastructure: Aadhaar, the Unified Payments Interface, and Direct Benefit Transfer as scalable, low-cost digital finance models.
- Caveat: these successes do not guarantee a self-sustaining, higher-growth trajectory without resolving deeper structural constraints.

### Structural vulnerabilities
- Missing private investment engine
  - India’s overall investment rate has hovered around 33 percent of GDP, but composition is skewed toward public capital expenditure.
  - Private corporate investment is stuck at about 11 percent of GDP, compared with a historical peak of nearly 17 percent in 2008.
  - Paradox: corporate cash reserves are high and bank balance sheets are primed to lend, yet private firms—particularly medium-sized manufacturing firms—remain cautious.
  - Investment concentration: a handful of large business groups and sectors benefiting from government incentives (renewable energy, telecommunications services, data centers, electronics assembly) account for much of recent investment.
  - Binding frictions: uncertainty about future demand and returns, regulatory friction, unpredictable policy shifts, compliance complexities, and an uneven playing field.

- Jobs and productivity mismatch
  - Sectoral shares and employment distribution:
    - Agriculture: about 15 percent of GDP, nearly half the total workforce.
    - Manufacturing: about 13 percent of GDP, about 11 percent of workers.
    - High-value modern sector (IT, finance, business services): roughly 15 percent of GDP, 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.
  - Structural risk: output growth concentrated in capital-intensive, skill-intensive sectors while formal high-quality job creation lags.
  - Potential for manufacturing: over $100 billion in annual imports from China suggests scope for partial substitution that could generate millions of jobs if firms can scale and integrate into global value chains.
  - Constraints from global environment: protectionism, reshoring, and automation complicate replication of past export-led models.

- Fragmented market
  - K-shaped divergence: thriving formal urban high-end consumption and digital entrepreneurship versus stagnant rural wages and widespread informality.
  - Indicators:
    - More than a hundred “unicorns” in the entrepreneurial ecosystem.
    - Over 85 percent of the workforce in informal employment, lacking social security or predictable income.
    - Real rural wage growth flat or negative when adjusted for persistent food inflation.
  - Economic implication: unequal distribution of wealth caps domestic mass-market demand, limiting the scale of domestically driven private investment.

### Innovation deficit and demographic challenge
- R&D shortfall:
  - Total R&D spending remains stuck at roughly 0.7 percent of GDP.
  - Advanced innovation economies routinely spend 3 percent of GDP or more.
  - India is a major user of frontier technology but a marginal producer of core intellectual property in semiconductors, artificial intelligence, biotech, and advanced manufacturing.
- Demographics:
  - Median age roughly 28 (compared with nearly 40 in China and over 44 in Europe).
  - Demographic dividend is not automatic: it must be earned through education and upskilling; otherwise, labor-force growth could outpace job creation.

### Policy priorities and recommendations
- Revive private investment
  - Create a more predictable regulatory environment.
  - Lower compliance burdens.
  - Implement conditions that raise expectations for returns on long-term capital.
- Accelerate labor reallocation and job creation
  - Shift labor from low-productivity agriculture to labor-intensive manufacturing and modern services.
  - Invest in skills development, logistics, and urban infrastructure to enable large-scale employment absorption.
- Reorient fiscal priorities toward human capital and innovation
  - Prioritize education, health, and R&D alongside continued physical infrastructure investment to build long-term productivity and technological sovereignty.
- Strategic objective: translate macroeconomic stability and infrastructure gains into a self-sustaining private investment cycle, abundant formal jobs, domestic technological sovereignty, and broad-based rises in household incomes.

### Key statistics and exact figures (as reported)
- Annual real GDP growth averaged roughly 7 percent.
- Consumer price inflation anchored near the 5 percent mark.
- Gross nonperforming assets: from more than 11 percent to less than 3 percent.
- Investment rate: around 33 percent of GDP.
- Private corporate investment: about 11 percent of GDP; historical peak nearly 17 percent in 2008.
- Agriculture: about 15 percent of GDP; nearly half the workforce.
- Manufacturing: about 13 percent of GDP; about 11 percent of workers.
- Modern high-value sector: roughly 15 percent of GDP; directly employing 3 percent of the workforce.
- Informal employment: over 85 percent of the workforce.
- Annual imports from China: over $100 billion.
- R&D spending: roughly 0.7 percent of GDP; advanced innovation economies: 3 percent of GDP or more.
- Demographics: median age roughly 28; nearly 40 in China; over 44 in Europe.
- Entrepreneurial ecosystem: more than a hundred “unicorns.”

*Source: "Can India Sustain Its Rise?" by Duvvuri Subbarao, F&D Magazine, September 2026.*

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_Source: https://www.imf.org/en/publications/fandd/issues/2026/09/can-india-sustain-its-rise-duvvuri-subbarao_