Reform for Sustained Growth: Why India Needs Structural Change

Context

India’s economy is expected to grow by around 8%, despite the West Asia conflict and higher oil prices. Measures such as FCNR(B) deposit mobilisation have also strengthened the external sector, but sustaining this growth requires deeper structural reforms beyond short-term policy support.

Factors Supporting Economic Resilience

1. Policy Support: Direct tax cuts, GST rate rationalisation, 150 bps policy-rate cuts, and financial-sector regulatory easing in 2025 boosted demand, borrowing and economic activity.
2. Export Competitiveness: Stronger non-oil exports, nearly 15% REER depreciation, and lower US tariffs supported India’s external demand.
3. Energy Diversification: Russian crude and US and Omani LNG helped avoid supply shortages. The government absorbed much of the higher energy cost, though this increased fiscal pressure.
4. Public Investment: Continued public capex supported infrastructure and economic activity and helped crowd in private investment.
5. Financial-Sector Resilience: Strong bank balance sheets, improved asset quality and regulatory easing supported credit growth and financing for households and businesses.

Cyclical Growth vs Structural Weakness

1. Cyclical growth means growth driven by temporary factors such as tax cuts, lower interest rates and easier credit. India’s recent growth largely reflects these factors rather than a sustained rise in productive capacity.
2. Structural growth requires long-term expansion driven by fundamental, permanent changes in how an economy, market, or industry operates, rather than temporary business cycles. However, India’s investment rate remains around 32% of GDP, while corporate capex is only 10–11% of GDP.
3. The top 1,000 listed companies showed no clear revival in corporate investment during 2025–26, highlighting the structural weakness.

Challenges

1. Cyclical Growth: Growth depends heavily on tax cuts, rate cuts and credit growth, which may not last.
2. Weak Private Capex: Investment remains at 32% of GDP and corporate capex at 10–11%, reflecting weak demand.
3. Slowing Public Capex: Central government capex growth fell to just 1.6% in 2025, limiting fiscal support.
4. Rising Household Debt: Fast growth in NBFC and unsecured personal loans is increasing household leverage.
5. Employment Challenge: High self-employment, continued dependence on agriculture and rising capital intensity limit quality job creation.
6. Export Constraints: Goods exports have fallen to 11% of GDP, while tariffs, Quality Control Orders (QCOs) and non-tariff barriers reduce competitiveness.
7. Global Risks: China’s excess capacity, trade uncertainty and oil-price shocks can weaken exports and increase external pressures.

Way Forward

1. Structural Reforms: Shift from short-term stimulus to productivity-enhancing reforms.
2. Job Creation: Promote labour-intensive sectors and raise household incomes.
3. Skill Development: Invest in education, healthcare and skilling to improve labour productivity.
4. Private Investment: Improve demand visibility and reduce the cost of doing business to revive private capex.
5. Export Growth: Rationalise tariffs, QCOs and non-tariff barriers to strengthen global competitiveness.
6. Fiscal Discipline: Balance welfare spending with productive capital expenditure.
7. Investment Mobilisation: Use public capex to crowd in private investment and FDI.
8. External Stability: Sustain consumption, exports and investment to strengthen the BoP (Balance of Payment) and support long-term growth.

Conclusion

India has shown strong macroeconomic resilience, but short-term policy support cannot replace stronger investment, employment and exports. The focus must now be on structural, investment-led and employment-intensive growth to achieve sustained high growth.

FAQs

Q1. What is REER and why is it important?
Ans. REER (Real Effective Exchange Rate) measures a currency’s value against trading partners after adjusting for inflation. Its depreciation can improve export competitiveness.

Q2. How does public investment support private investment?
Ans. Public capex improves infrastructure and demand, helping crowd in private investment and FDI.

Q3. Why is rising household credit a concern?
Ans. Rapid growth in NBFC and unsecured loans increases household debt. If incomes do not grow equally, households may face difficulty in repaying loans

Q4. Why are labour-intensive sectors important?
Ans. They generate more employment with relatively less capital, helping India achieve inclusive and employment-intensive growth.

Q5. What is the Balance of Payments (BoP)?
Ans. BoP records a country’s transactions with the rest of the world. Strong exports and stable capital flows help maintain external stability.

Q6. What is an FCNR(B) deposit?
Ans. FCNR(B) (Foreign Currency Non-Resident–Bank) deposits are foreign-currency deposits held by NRIs with Indian banks. They help bring foreign currency into India and strengthen forex reserves and external stability.