India heads into the new year continuing to be the fastest-growing large economy in a world marked by challenges. The latest World Economic Outlook of the International Monetary Fund (IMF) indicated a continued slowdown in global economic growth, with risks remaining tilted to the downside. This came amid disruptions brought by US tariffs, which also brought 25% extra tariffs on Indian goods, making it a total of 50% on goods exported by India to the US. On November 28, the National Statistical Office (NSO) announced 8.2% GDP growth for Q2 of FY 25-26. The growth in the face of a global slowdown, the punishing Trump tariffs, and the 7.8% GDP growth of Q1 FY 26, is noteworthy. There have been contributions by all three sectors: primary (agriculture at 3.5%); secondary (industry at 7.7% and manufacturing at 9.1%); and tertiary (services at 9.2%), indicating that the core of the economy is robust.
Sceptics about these numbers and the upgrade in the GDP growth rate are not far to find. Recently, the IMF rated India’s GDP data quality a low ‘C’. “Economic change in all periods depends more than most economists think on what people believe,” wrote Joel Mokyr, the 2025 Nobel Laureate in Economics, in the opening of his 2010 book, The Enlightened Economy: An Economic History of Britain 1700-1850. We may ask: what do people believe in the case of India’s growth story?
With the post-pandemic revival of the economy, the GDP growth of India has been exceeding expectations year after year. The 9.2% growth in FY 2024 was dismissed as a statistical mirage driven by very low deflators, and it was predicted that growth would come down the following year. In FY 2025, India delivered a GDP growth of 6.5%, taking the average two-year growth to 7.85%, far beyond the deflator washout hypothesis.
India’s long-term GDP growth since 2000 has been 6.5%. Seemingly, its potential growth has moved up to over 7%. What is adding to this is an array of reforms and affirmative actions taken by the Union government in the last decade. Macro-economic reforms include the consolidation of the fragmented indirect tax regime into GST and its rationalisation this year, legislative creation of the Exit Policy-Bankruptcy Code (IBC), Real Estate Regulatory Authority (RERA), and Monetary Policy Committee (MPC). India has transitioned from the fragile five in 2013 to a micro-economically stable geography represented by low inflation, low fiscal deficit, a contained debt-to-GDP ratio, an endurable current account deficit, and high forex reserves.
The RBI’s State of the Economy paper, published in December, noted, “Continued focus on macro-economic fundamentals and economic reforms should help unlock efficiencies and productive gains to firmly keep the economy on a high growth trajectory amidst a fast-changing global environment”. These reforms have been supplemented by the cleanup of balance sheets of banks and corporates, creation of a national digital public infrastructure, a major shift in public expenditure towards capital formation-infrastructure build-up and a steady decline of fiscal deficit.
Schemes such as Lakhpati Didis, Mudra Loans, and support to Farmers’ Producers Organisations launched in the last decade are playing out now. The National Agriculture Market, e-NAM, that networks existing Agriculture Produce Market Committees and individual farmers, has been put on a robust frame. Such affirmative actions have provided financial support and led to job creation, skill enhancement, capacity building, and market linkages, bringing financial and social inclusion to the lowest strata of society, especially in rural areas and those engaged in agriculture.
A new governance direction
Confidence amongst professionals and institutions in public policies is validated in part by the growing number of Global Capacity Centres (GCCs). Nearly 1,800 GCCs, employing over 19 lakh people, generated a revenue of $64.6 billion by 2024. Steps such as self-attestation, self-assessment, decriminalisation of offences/lapses, push for refund of public money by banks, insurance companies and mutual funds, and tax authorities, etc., seem to indicate the direction of governance is moving, albeit slowly, from policing to an administrative state. Implementation of the recently announced labour reforms and the Gauba Committee recommendations focusing on easing the burden for Macro, Small and Medium Enterprises (MSMEs), and legislation on the securities market and nuclear power will likely aid growth.
These steps are leading to growing economic engagement, improving infrastructure, declining logistics cost, reducing financial repression, and rising incremental capital output ratio (INCOR). Whereas the measures may not look like the 1991 Big Bang reforms, these incremental steps seem to be favourably influencing India’s GDP growth.
However, lifting the potential GDP growth to over 8%, the minimum required rate for achieving a developed economy status by 2047, warrants institutional reforms that cover the judiciary, public administration, and police, among others, in addition to land reforms, electricity reforms, etc. These are essential for a reduction in time and cost of enforcing contracts, land acquisition, ease in the delivery of public services, and raising total factor productivity. It is important to note that currently, only one of the investment engines is firing at full throttle – the public sector. Public investments have budgetary limitations. Private sector investments continue to be sluggish. The government must engage with trade and industry bodies to understand why this is so and take appropriate measures to spur private sector investment. This is India’s moment to capitalise on its demography and build a prosperous nation.
(The writer is a former chairman of SEBI and former chairman of LIC;
Syndicate: The Billion Press)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.