Indian economy continues to be one of the fastest-growing large economies. While GDP growth has slowed down to 6% year-on-year in the April-September period of the current financial year, the economy remains resilient. Real GDP growth is projected to grow at 6.5% in 2024-25 and 2025-26, backed by healthy private consumption, and a robust financial sector. However, rising global uncertainty, particularly the risk of recession in key export markets such as the United States, is emerging as a potential drag on growth, prompting policymakers to revise expectations toward the lower end of the forecast band.
The impressive growth trajectory places India on course to overtake Japan as the third-largest economy by the third quarter of the next financial year, and Germany the very next year. While Japan saw its GDP stagnating at around $4.4 trillion in the past decade, India’s national income has doubled to $4.27 trillion during the period. The German economy, currently at $4.9 trillion, has also witnessed slower growth compared with India. If India maintains the current growth rate to add at least $1 trillion every 18 months, it will become a $10 trillion economy by 2032.
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Services power Indian economy
The financial sector is a source of strength for the Indian economy, with non-performing assets hitting multi-year lows and capital markets showing resilience. Despite heavy foreign institutional investor outflows, the equity markets remained stable because of the rising participation of domestic institutional investors. Steady investment flows from domestic institutions reflect the strength of India’s middle class and rising household savings that led to the deepening of financial markets.
India’s services sector continued to be a growth engine for the economy, led by the steady expansion in public administration, defence, and financial services. Exports of services rose by 21% between April and October 2024 compared with the same period in the previous year. The gave an impetus to GDP growth and employment generation. High-value manufacturing exports of electronics, engineering goods, and chemicals gathered momentum to contribute a third of India’s merchandise exports, signalling the country’s deeper integration into global value chains.
Inflation, investment and fiscal priorities
Inflation rate stayed within the Reserve Bank’s comfort range of 2-6%, helped by a strong harvest season and supportive government intervention to ensure steady food supply. Despite core inflation inching upwards, the RBI kept policy rates unchanged for eleven bimonthly monetary policy reviews, looking to maintain macroeconomic stability and curb inflation expectations. Good monsoon rains boosted agricultural output which grew by a five-quarter high 3.5%. This fuelled strong rural consumption, evident in declining MGNREGA job demand and robust sales of FMCG items in rural areas.
India appears to be on a path of fiscal consolidation. The fiscal deficit stood at 4.4% of GDP in the second quarter, with only 29.4% of the budgeted deficit incurred, significantly lower than the previous year. Public capital expenditure, however, has been subdued, with only 37.3% of the budgeted amount spent in the first half of the fiscal, compared with 49% in the same period last year.
This underutilisation, influenced by election-related delays and monsoon disruptions, is expected to reverse in the latter half of the fiscal as the government ramps up spending to meet annual targets. A substantial boost to public investment in infrastructure is anticipated, which could crowd in private investment and revive demand.
Despite these positives, several downside risks could impact the near- and medium-term outlook. The deepening of global economic fragmentation and persistent geopolitical tensions, especially in the Middle East and Red Sea region, are disrupting global supply chains and weighing on exports. Petroleum product exports have consistently declined, while imports of oil and gold have surged, putting pressure on the current account. Additionally, there are concerns about import surges in items such as plastics, chemicals, and electronic components, suggesting possible dumping from neighbouring countries and posing risks to domestic industries.
Investment activity has also been impacted. Gross fixed capital formation—a critical measure of investment—slowed to 5.4% in the second quarter. Private investment remained subdued due to uncertainties around global trade, evolving technologies, and dampened corporate earnings. Moreover, with a muted recovery in real income levels, private consumption could remain below expectations, further affecting domestic demand.
Climate change presents another structural risk, with the potential to disrupt agricultural productivity, escalate food prices, and weaken rural consumption. This highlights the need for urgent policy focus on climate-resilient agriculture and rural infrastructure.
The global economic outlook, particularly the slowdown expected in the United States, is likely to cast a shadow on India’s near-term growth prospects. Senior government officials now anticipate that economic growth in FY2025–26 could settle at the lower end of the 6.3–6.8% range projected in the Economic Survey. This moderation is being driven in part by escalating global trade tensions following sweeping tariffs introduced by US President Donald Trump.
With major US institutions such as JPMorgan and Citi forecasting a potential recession or near-zero growth in the US, Indian exports could face significant headwinds. However, some mitigating factors remain: declining energy prices, particularly Brent crude, which recently fell to a four-year low, could ease import bills and boost domestic consumption. Additionally, proposed income tax cuts in the US may provide a modest cushion for global demand.
Structural reforms and fiscal federalism
India’s adoption of a medium-term debt-GDP target and efforts in fiscal consolidation have been acknowledged globally. However, fiscal disparities across states must be addressed through a more integrated framework involving both central and state governments. High debt levels in states like Punjab, Uttar Pradesh, West Bengal, Kerala, and Bihar, along with rising incremental debt in others like Tamil Nadu and Karnataka, necessitate a comprehensive national debt management strategy.
The IMF has suggested replacing the current narrow fiscal deficit focus with a broader and globally recognised debt-GDP ratio target by 2028. This would require the inclusion of debt liabilities of all tiers of government—Centre, states, and Union Territories—to create a holistic fiscal roadmap.
The IMF has highlighted the need for a more equitable Finance Commission framework that rewards states performing well on health, education, and population control. Southern states, which often excel in these domains, deserve better compensation under central transfers to ensure balanced and fair federal fiscal relations.
On monetary policy, while the IMF advocates greater exchange rate flexibility, India’s calibrated currency management approach has proven effective in maintaining rupee stability during episodes of both appreciation and depreciation. This has helped shield the economy from excessive volatility, especially during periods of global financial turbulence. Given the current environment of geopolitical risk and capital flow uncertainty, maintaining this cautious approach may be more pragmatic than adopting a fully liberalised exchange rate regime.
Structural reforms remain essential for sustaining long-term growth. Although female labour force participation has increased post-COVID, much of the employment remains in the informal or low-quality segment. Labor market reforms, skilling initiatives, and measures to increase formal sector participation are vital.
Additionally, boosting public investment in health and education is crucial to achieving the vision of a “Viksit Bharat” by 2047. India’s current expenditure on education stands at around 4.6% of GDP, while healthcare spending is under 3%. These must be increased to at least 5–6% and over 4% of GDP respectively to align with the benchmarks set by developed economies and to prepare India’s workforce for the future.
India’s economic outlook remains promising, supported by robust fundamentals, a growing middle class, resilient financial markets, and expanding services exports. However, global headwinds, domestic capex delays, and structural imbalances demand continued policy attention. A coordinated strategy—focused on fiscal discipline, deeper structural reforms, and targeted investment in physical and human capital—is essential for India to maintain its growth momentum and achieve its long-term developmental goals. The country stands well-positioned to lead among emerging economies, but success will depend on how deftly it navigates the challenges ahead.
Dr Ravindran AM is an economist based in Kochi. He has more than three decades of academic and research experience with institutions such as CUSAT, Central University of Kerala, Cabinet Secretariat - New Delhi, and Directorate of Higher Education Pondicherry.