The Indian economy – glass half empty
The Indian economy has indubitably shown brilliant resilience and sustained the base growth rate of ~6%. In the current year FY26 also the real GDP is expected to grow in the range of 6.3% to 6.6% (vs 6.5% in FY25).
It is expected that the tax incentive offered in the budget for FY26 may support urban consumption demand, that has been lagging for the past couple of years, while the rural demand has shown some pick-up. Good monsoon may further stimulate rural demand. Benign inflation and below potential growth trajectory shall keep the RBI on the monetary easing path. Rates may fall further and liquidity may remain supportive. Continued focus on capacity building by the government may however continue to remain the mainstay of the growth.
The global environment remains challenging with trade related uncertainties and geopolitical tensions persisting. However, a resolution of trade and geopolitical conflicts could provide strong impetus.
In my view, 6% (+/- 50bps) may now be the base growth rate (or the new Hindu rate of growth, if you like) for the Indian economy. If India can manage to meet the basic needs (food, clothing, shelter, water, electricity, sanitation, basic education, and primary health) of its 1.4 billion population, our economy might keep growing at this rate for the next decade or so, at least. However, this base rate of growth may not be sufficient to lift the Indian economy to the middle income category like China, Brazil, South Korea, Malaysia, Indonesia, etc.
We urgently need catalysts that may provide the necessary escape velocity to catapult the India economy into a higher growth orbit. Unfortunately, the current growth paradigm lacks those catalysts.
To make my point clear, I would like to highlight the following three inadequacies of India's current growth paradigm.
Declining trend of global integration
The Indian economy has failed to maintain the pace of globalization. The share of India in global trade has remained marginal. In the past 11 years, our exports, as a percentage of GDP, have declined ~14% from 25.2% of GDP in FY14 to 21.6% of GDP in FY25. Similarly, imports have also declined from 27% of GDP in FY14 to 22.5% of GDP in FY25.
India’s exports have grown at a CAGR of 4.64% during FY15-FY25, while imports have grown at a CAGR of 4.36% during this period. The real GDP in this period has grown at a CAGR of 6.09%.
Even worse, the merchandise exports (mostly manufactured goods) have grown at a meager CAGR of 2.54% in the past 11 years. The share of merchandise export, as a percentage of GDP, has contracted 28.6% since FY14. Manufacturing GVA in FY25 was at all time low. Obviously, the government strategy of incentivizing manufacturing and boosting exports is not yielding good results, and may need a comprehensive overhaul.
Rate of investment remains low
The rate of investment in the Indian economy has shown some pick up in the post covid period, but it still remains much below the rate seen during 2004-2013 period. Gross Fixed Capital Formation (Investments) have grown at a CAGR of 6.41% (vs Real GDP CAGR of 6.09%) during FY15-FY25. Obviously, this rate of growth in investments is not adequate to gain escape velocity.
The corporate capex growth has also slowed down to just 8% in FY25, after two years of higher growth (27% in FY23 and 20% in FY24)
Consumption not growing
The share of private consumption in the GDP has remained stagnant around ~56 over the past 15 years (except during Covid years). In the past 11 years (FY15 to FY25) it has grown at a CAGR of 6.06%, less than the real GDP growth CAGR of 6.09%. Interestingly, in this period taxes on goods and services have increased at a CAGR of 6.41%.
Government consumption has also slowed down in this period from 10% of GDP in FY14 to 9.1% of GDP in FY25. Overall, government consumption has grown at a slower CAGR of 5.18% during FY15-FY25.
Notably, NSO second advance estimates of FY25 GDP has projected private consumption growth at 10% in 4QFY25 vs the actual 6%. For the full year private consumption growth of 7.2% was also marginally lower than the NSO forecast of 7.6%.
So, if none of the engines of growth – exports, consumption and investments – is showing signs of acceleration, achieving a higher target may not be possible; even though we may just draw comfort from the fact that base growth rate is now higher s compared to 1950-1990 period.
Next week – Growth statistics – the disconnect
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