Navigating Economic Crossroads: India's Path to Sustainable Growth
As 2026 unfolds, India's economy shows signs of a cyclical upswing, marked by encouraging GDP figures, accelerating credit growth, and improving business sentiment. This near-term buoyancy stems from several supportive factors in 2025, including GST and income tax reductions, monetary and regulatory easing, favorable crude oil prices, and a robust monsoon season. These elements have collectively provided a temporary lift to economic activity.
The Critical Demand Rotation
The pressing question, however, is how to maintain strong growth once these cyclical impulses diminish. Achieving this requires two fundamental rotations in the economy. The first involves a shift in demand drivers. Post-pandemic growth was largely fueled by public investment, a revival in real estate, and strong service exports. Yet, these forces are now waning.
Central capital expenditure, which grew at an annual rate of 30% for four years after the pandemic, has slowed to around 10% due to capacity constraints. State-level capex faces risks from competitive populism. Meanwhile, the residential real estate sector has experienced a sharp slowdown, primarily because it relied heavily on high-end buyers who may have reached saturation.
For sustained recovery, demand must rotate towards private consumption and private investment, which have lagged since the pandemic. Rural consumption has shown recent improvement, but urban consumption remains tentative. Auto sales have rebounded post-GST cuts, yet consumer durables production has only modestly increased, and much of the personal credit growth is driven by gold loans, indicating supply-side factors rather than robust demand.
Additionally, wage growth for listed companies has decelerated from 15% in 2022-2023 to mid-single digits in 2025. The durability of the consumption recovery hinges on strengthening household balance sheets and employment in 2026.
Export Challenges and Private Capex
Goods exports have demonstrated resilience despite punitive US tariffs, with exporters finding alternative markets. However, non-oil export growth slowed to 3% by the end of last year, posing challenges for 2026. In a global environment characterized by Chinese excess capacity and US policy capriciousness, a broad-based private investment recovery requires both strong domestic demand visibility and investor confidence.
Cash flow statements of listed companies reveal that capex slowed in the first half of this fiscal year compared to the previous year, contrary to market expectations. The fate of private capital expenditure now depends on the strength of consumption and export recoveries. Whether a durable recovery in these areas can stimulate private investment remains a critical question for the economy.
From Cyclical to Structural Underpinnings
The second rotation involves transitioning from cyclical supports to structural foundations. The scope for further cyclical assistance is limited. Rampant Chinese overcapacity may contain inflation but could also pull nominal GDP growth into single digits. Assuming 9% nominal growth, the combined fiscal deficit must be reduced by another percentage point of GDP to maintain public debt at 80% of GDP, leaving no room for additional fiscal support.
Lower nominal GDP prospects also contribute to perceptions of an expensive equity market, explaining the reluctance of foreign portfolio flows. While low inflation allows for monetary policy flexibility, real rates are already at 1.25%, offering minimal space for further easing.
Consequently, cyclical supports must give way to structural reforms. Policymakers deserve commendation for initiating this process by reintroducing reforms such as GST rationalization, new labor codes, and 100% FDI in insurance, and by avoiding export pessimism through free trade agreements.
Long-Term Structural Imperatives
The structural requirements are extensive. Over the past two decades, growth has become prematurely capital-intensive, necessitating a reversal towards labor-intensive growth to generate household incomes for sustained consumption. This demands a mission-like focus on education, skilling, and health to enhance employability as labor competes with capital.
Human capital augmentation is India's most significant imperative over the next decade. If industrial policy is implemented, it should target labor-intensive sectors, ensuring that formalization does not increase labor costs to the point of encouraging capital intensity.
Moreover, the export push must be advanced by joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a major trading bloc accounting for 15% of global trade. The upcoming budget presents an ideal opportunity to simplify, rationalize, and liberalize customs duties, import tariffs, and non-tariff barriers like Quality Control Orders. In a world of global supply chains, the adage that an import tariff is an export tax holds truer than ever.
Urgency and Future Outlook
There is no time to waste. Over the last decade, per capita GDP growth in US dollars has averaged 5.9%. To reach $15,000 per capita by 2047, growth must accelerate to 8% annually for the next 22 years, even as India's working-age population growth declines from 1.5% to zero. This scenario requires a substantial increase in labor productivity, driven by a relentless pace of reform.
The task is clear and daunting but not impossible. As the rules-based global order crumbles, giving way to a more volatile environment, only sustained economic reforms can induce investment, attract capital flows, create jobs, and provide a protective shield for the Indian economy against a hostile and precarious global backdrop.
