India’s recent economic performance has been strong enough to inspire confidence. Over the past decade, and particularly in the post-COVID-19 pandemic period, India has combined relatively high growth with macroeconomic stability in a way that few large economies have managed. Real GDP growth has remained robust, reaching 6.5% in FY2024-25, making India one of the fastest-growing major economies globally. This performance has been underpinned by strong domestic demand, subdued inflation, gradual fiscal consolidation, and a broadly stable financial sector.

While India’s productivity growth has been meaningful over recent decades, sustaining high growth will require acceleration, particularly as India aspires to become Viksit Bharat by 2047. That transition will require not just maintaining macroeconomic stability but also activating all engines of growth, labour, capital, and improved productivity, through deeper structural reforms.

Manufacturing without depth

There is now growing recognition, reflected in the Economic Survey 2025-26, that manufacturing must anchor this next phase. The challenge, however, is not just expanding manufacturing, but also making it more productive. India’s structural transformation has been skewed. While services have driven growth, manufacturing has not expanded sufficiently to absorb labour or generate broad-based productivity gains. In most successful development experiences, manufacturing acts as the bridge between low-productivity agriculture and high-productivity modern sectors.

The Economic Survey reinforces this point, emphasising that manufacturing is central to sustaining growth and generating employment at scale. Without it, India risks a growth pattern that is neither sufficiently robust nor structurally stable. While productivity growth in services has been strong, manufacturing productivity has lagged behind both its potential and that of its international peers. A key issue is firm structure. India’s manufacturing sector is characterised by a large number of small, low-productivity firms and relatively few mid-sized firms capable of scaling up. This is in stark contrast to economies that successfully industrialised, particularly in East Asia, which saw the emergence of a strong cohort of medium and large firms that drove exports and productivity growth.

Therefore, the current structure creates a challenge for efficient factor allocation, leading to a significant share of labour remaining in agriculture, where productivity is far lower than in manufacturing and services. Most importantly, despite significant investment — particularly in infrastructure — efficiency gaps remain.

Zombie firms, stalled reallocation

These structural constraints converge into a deeper problem, reflected in a weak business dynamism. In economic theory, productivity growth is often driven by creative destruction, in which new, more efficient firms replace older, less productive ones. In practice, this process remains slow in India. As a result, the persistence of small, low-productivity “zombie” firms impedes the efficient reallocation of resources. Zombie firms that are no longer economically viable but continue to operate nonetheless tie up capital and labour that could otherwise be deployed in more productive uses.

Evidence from recent studies further reinforces this concern. A paper, Zombie Firms in Emerging Markets: Survival and Funding Mechanisms (2025), shows that while zombie firms constitute a relatively small share of firms, they account for a disproportionately large share of total debt and assets. This implies that a significant volume of capital is locked into low-productivity uses, creating systemic inefficiencies. The research also shows that zombification is a gradual process. Financial deterioration begins well before firms are classified as zombies, and once they enter this state, they become increasingly dependent on debt while showing little recovery in core performance indicators. The problem is persistent, not cyclical. Crucially, the nature of financing matters. Bank-financed firms are more likely to become zombies, remain in distress for longer periods, and relapse even after partial recovery. In contrast, equity-financed firms are less prone to zombification and more likely to recover sustainably.

These findings point to a deeper institutional issue. Financial and regulatory structures often sustain inefficient firms rather than facilitating exit. This weakens reallocation by crowding out credit from more productive firms, thereby undermining overall productivity growth.

Two-pronged strategy

India’s path to Viksit Bharat requires a manufacturing-led strategy that addresses both scale and efficiency. India has demonstrated that it can grow rapidly. The next phase is about ensuring that this growth translates into sustained increases in productivity and income. There is growing recognition that manufacturing is the weak link in India’s development story and that expanding manufacturing will require deeper integration into global value chains, managing trade barriers, and continued infrastructure investment. Equally important is improving productivity through stronger business dynamism and productive research and development. This means enabling firms to grow, but also allowing inefficient firms to exit. Reforms must therefore focus on simplifying regulations, easing labour constraints, strengthening insolvency processes, improving credit allocation, and expanding access to financing.

The vision of Viksit Bharat ultimately depends on whether India can complete this transition. Growth has laid the foundation, but enhanced productivity and the exit of inefficient firms will determine whether it can sustain the leap to Viksit Bharat.

Saumitra Bhaduri is Professor at the Madras School of Economics

Published – May 16, 2026 12:08 am IST

‘The overarching aim of the Budget was to accelerate growth and push India towards a developed country status’
| Photo Credit: PTI

The Union Budget has got many things right. Its projection of nominal GDP growth for 2025-26, at 10.1%, is reasonable and acceptable. The Economic Survey 2024-25 had indicated a real GDP growth in the range of 6.3%-6.8% for 2025-26. This provides some buffer if growth picks up more. The increase in the capital expenditure of the government in 2025-26 over the revised estimates of 2024-25 is estimated at ₹1.03 lakh crore. But the capital expenditures in 2025-26, at ₹11.2 lakh crore, are nearly the same as was indicated in the Budget of 2024-25 at ₹11.1 lakh crore.

The overarching aim of the Budget was to accelerate growth and push India towards a developed country status. The required rate of real growth to achieve this is estimated differently including a rate of 8% in the Economic Survey for 2024-25. In any case, the country needs a definite pickup in growth rate. The various measures indicated in the Budget are welcome. In fact, some of these could have been implemented even earlier. The concession given to the ‘middle-class’ in terms of income-tax is welcome as a relief. But its impact on demand depends on the marginal propensity to consume of the households who are expected to largely benefit from these concessions and their consumption basket.

Gross tax revenues

Growth in the Government of India’s gross tax revenues (GTR) have trended downwards in recent years. The buoyancy of GTR has fallen for three successive years from 1.4 in 2023-24 to 1.15 in 2024-25 (RE) and then to 1.07 in 2025-26 (BE). As a result, growth in the Government of India’s GTR has kept falling from 13.5% in 2023-24 to 11.2% in 2024-25 (RE), and to 10.8% in 2025-26 (BE). Within the government’s tax revenues, the growth rate of Goods and Services Tax (GST) has also fallen from 12.7% in 2023-24 to 10.9% in 2025-26 (BE).

In fact, the structure of the government’s taxation has moved away from indirect to direct taxes. The share of direct taxes in the government’s GTR has increased from 52% in 2021-22 to 59% in 2025-26 (BE) which is a welcome development. Within direct taxes, however, it is personal income-tax which has performed better than corporate income-tax in terms of growth and buoyancy.

However, even in the case of personal income-tax there has been a fall in growth from 25.4% in 2023-24 to 20.3% in 2024-25 (RE) and 14.4% in 2025-26 (BE). This fall in growth in 2025-26 (BE) is partly due to the announced income-tax concessions. In the case of corporate income-tax, the growth in 2024-25 (RE) is quite low at 7.6%. This growth has been raised to 10.4% in 2025-26 (BE). On the whole, assumptions regarding the government’s tax revenue growth in 2025-26 (BE) appear to be realistic.

In the case of non-tax revenues, the main contribution has been in the form of dividends from the Reserve Bank of India and public sector companies, which together accounted for about ₹3.25 lakh crore in 2025-26 — an increase of ₹35,715 crore over the revised estimates. Thus, the non-tax revenues have been raised from ₹5.3 lakh crore (RE) to ₹5.8 lakh crore in 2025-26 (BE).

Level of government expenditure

Tax and non-tax revenues, non-debt capital receipts and fiscal deficit together determine the size of government expenditure. As discussed, a gross tax revenue growth at a lower level of 10.8% appears to be realistic. Given the commitment to fiscal consolidation, the size of government expenditure as a percentage of GDP had to be reduced from 14.6% in 2024-25 (RE) to 14.2% in 2025-26 (BE). Growth in total expenditure, at 7.6% in 2025-26 (BE), is lower than the budgeted nominal GDP growth at 10.1%.

In fact, this was so even in 2024-25 (RE), when the government’s total expenditure growth was 6.1% as against the nominal GDP growth of 9.7% as per the first advanced estimates. However, there has been a steady improvement in the quality of government expenditure as the share of capital expenditure in total expenditure has been improving. In fact, this share has improved by 10% points over the period from 2020-21 to 2025-26 (BE). Given the contemporary context, the Government of India has to build up large-scale Artificial Intelligence (AI) infrastructure in order to facilitate the adoption of emerging technologies. In this context, China has taken a clear lead. The United States has recently announced an investment of $500 billion for AI infrastructure. In the field of AI, India’s technology companies have failed to anticipate developments. India should have done what China did. Perhaps, India should push these companies for research and development, by offering some tax concessions, if necessary.

A less transparent fiscal health indicator

One wrong measure introduced in the Budget is to move away from fiscal deficit as an indicator of fiscal prudence. Contrary to what is stated in the Budget document, we are moving from a transparent to a less transparent indicator. As per the glide path given in the Medium-Term Fiscal Policy Cum Fiscal Policy Strategy Statement of the 2024-25 Budget, the fiscal deficit was to be brought down to below 4.5% by 2025-26.

However, in the 2025-26 Budget, the practice of giving a glide path in terms of fiscal deficit is being discontinued. It has been stated that from now on, the focus will be on reducing the debt-GDP ratio annually. In the annexure statement titled ‘Statements of Fiscal Policy as required under the Fiscal Responsibility and Budget Management (FRBM) Act, 2003’, alternative paths of the debt-GDP ratio with nominal GDP growth assumptions of 10.0%, 10.5% and 11.0% are given.

The glide paths are indicated in terms of alternative growth assumptions and alternative assumptions regarding mild, moderate, and high degrees of fiscal consolidation. This makes the whole exercise vague and non-transparent. It is better for fiscal discipline to indicate specific fiscal deficit target for different years and the corresponding debt-GDP ratios for those years. It should clearly be shown by what year the FRBM Act targets are to be achieved. A larger claim on the available investible resources by the government will make it difficult for private investment to pick up.

C. Rangarajan is Chairman, Madras School of Economics and a former Governor of the Reserve Bank of India. D.K. Srivastava is Honorary Professor, Madras School of Economics and Member, Advisory Council to the Sixteenth Finance Commission. The views expressed are personal

‘In the light of a potential growth rate of 6.5%, the achievement of 6.4% in 2024-25 should not be considered as disappointing’
| Photo Credit: Getty Images/iStockphoto

The First Advance Estimates (FAE) of National Accounts for 2024-25 show a real GDP growth of 6.4% and a nominal GDP growth of 9.7%. These numbers have fallen short of the Reserve Bank of India’s revised growth estimate of 6.6% for real GDP, as in its December 2024 monetary policy statement and 10.5% for nominal GDP growth as in the 2024-25 Union Budget presented in July 2024.

The annual growth of 6.4% can be seen as consisting of 6% growth in the first half and 6.7% growth in the second half. There is, thus, a clear improvement expected over the Q2 growth of 5.4%. The sharp fall in 2024-25 annual GDP growth from that of the previous year at 8.2% is seen only in the case of GDP. With respect to Gross Value Added (GVA), this difference, between 7.2% and 6.4%, is much less. On the GVA side, it was the manufacturing sector which suffered a sharp fall in sectoral growth from 9.9% in 2023-24 to 5.3% in 2024-25.

Growth prospects for 2025-26

The Gross Fixed Capital Formation rate at constant prices has ranged between 33.3% and 33.5% during 2021-22 to 2024-25. Thus, it appears to have stabilised around 33.4%. It is expected to continue at this level in 2025-26. The average Incremental Capital Output Ratio (ICOR) has been marginally higher than 5 in recent years. Assuming ICOR to be 5.1 in 2025-26, we may consider a 6.5% real GDP growth to be realistic.

There may not be much change in the global economy even though Donald Trump’s assumption of office may create more uncertainty. India will have to largely depend on domestic demand.

In particular, the Government of India has to ensure that there is no relaxation in its investment expenditure. In fact, the slightly lower growth in 2024-25 is largely linked to the slowdown in the Government of India’s investment growth which has remained negative at (-)12.3% even after eight months into the fiscal year.

With a lower nominal GDP growth in 2024-25 of 9.7% as compared to the budgeted nominal GDP growth of 10.5%, the budgeted Gross Tax Revenue (GTR) of ₹38.4 lakh crore may not be realised if the budgeted buoyancy of 1.03 is maintained. As per Controller General of Accounts (CGA) data, GTR growth for the first eight months was 10.7%. If this growth is maintained for the remaining months also, the realised buoyancy would be about 1.1, which is higher than the budgeted buoyancy. In such a case, tax revenue shortfall will be minimal. In other words, any revenue constraint or likely pressure on fiscal deficit would not constrain the government’s ability to achieve its capital expenditure target of ₹11.1 lakh crore.

Reason for the dip

However, after the first eight months, the level of the Government of India’s capital expenditure has remained limited to ₹5.14 lakh crore, that is 46.2% of the Budget target. In the remaining four months, the Government of India’s capital expenditure may be accelerated. It may still fall well short of the target. This has been the main reason for the dip in overall real GDP growth in 2024-25.

Going forward in 2025-26, the Government of India will have to continue to rely on an accelerated capital expenditure growth which can be kept at least at 20% on the revised estimates for 2024-25. Sustained government capital expenditures can have a favourable effect on private investment. The size and the pattern of investment expenditure of the government should be designed to accelerate private investment as well.

Medium- to long-term growth prospects

Over a period of next five years, the best that India may hope for is a steady real GDP growth rate of 6.5%. This is in line with the International Monetary Fund’s real GDP growth projection for the Indian economy, as in its October 2024 release, which is at 6.5% over the period 2025-26 to 2029-30. This real GDP growth may be accompanied by an implicit price deflator (IPD)-based inflation of about 4% which can give a nominal GDP growth in the range of 10.5%-11%. In years in which global conditions improve and the contribution of net exports to GDP growth becomes significant, real GDP growth may touch even 7%. If a real growth of around 6.5% and a nominal growth in the range of 10.5%-11% are maintained over the long run with an average exchange rate depreciation of 2.5% per annum, India should be able to reach a per capita GDP level consistent with a developed country status in the next two and half decades. But the task is not going to be easy. It will be hard to grow at 6.5% as the base keeps on increasing. In fact, in the earlier years, the growth rate will have to be higher. But, at present, the potential rate of growth appears to be 6.5%. However, it can change.

In the light of a potential growth rate of 6.5%, the achievement of 6.4% in 2024-25 should not be considered as disappointing. In fact, the achievement of 8.2% in 2023-24 should be considered as a flash in the pan. The current year’s growth rate of 6.4% as in the first advance estimates should be seen in the context of India’s potential growth rate.

C. Rangarajan is former Chairman, Prime Minister’s Economic Advisory Council, and former Governor, Reserve Bank of India. D.K. Srivastava is Honorary Professor, Madras School of Economics, and Member, Advisory Council to the Sixteenth Finance Commission. The views expressed are personal

The first official gauge of the economy’s performance so far in 2024-25 pegs real GDP growth at 6.7% between April and June, a five-quarter low and below the central bank’s projection. The Reserve Bank of India (RBI), which expects a 7.2% GDP growth through 2024-25 following last year’s 8.2% surge, had revised its estimate for Q1 from 7.2% to 7.1%, earlier this month. The actual numbers are underwhelming and mark a clear cooling in the economic momentum, although some base effects are in play. Growth in the Gross Value Added (GVA) in the economy came in higher at 6.8%, after a year of widening divergences with the GDP print. At the onset of this fiscal year, major hopes hinged on a normal monsoon boosting farm sector output and easing inflation, which could lift the weak rural demand and private consumption witnessed last year. Higher demand would bolster private firms’ propensity to invest in new capacities, and ease the pressure on public spending to prop up growth. That the government would still ramp up capital expenditure by 17% to ₹11.11 lakh crore this year, while it waited for this narrative to unfold, was the other pillar underpinning this year’s growth aspirations.

As things stand, this script is yet to fully play out. The stretched general election has sharply scuppered public capex, and the government will need to redouble efforts to meet its spending goals. The good news is that private consumption spends bounced to a six-quarter peak of 7.4%, partly thanks to easing headline inflation. But food prices remain elevated. The monsoon has been better than last year but a tad erratic and uneven, temporally as well as spatially. Farm GVA growth has moved up to a four-quarter high of 2% but the next few weeks will determine whether the sector rebounds in earnest (and food inflation cools). Projections of above normal downpours in September may well affect standing kharif crops. This is a key monitorable for the RBI, whose independent monetary policy panel members have flagged a 1% GDP growth loss this year and next, if interest rate cuts are delayed. India may still grow 6.5% to 7% this year, but most expect growth to slip to 6.5% in 2025-26, with the medium-term potential hovering around that number. This is too slow for comfort. As top IMF official Gita Gopinath pointed out recently, policymakers need to urgently pursue meaningful reforms across all aspects of the economy, and improve the efficiency of its institutions and the judiciary. This is critical to lift its growth potential and fulfil hopes of creating gainful employment for its young, fast enough for India’s demographics to yield a dividend.

A Moody’s sign on the 7 World Trade Center tower is photographed in New York.
| Photo Credit: Reuters

Moody’s Investors Service on March 7 said that India’s robust economic growth will continue and its real GDP growth will accelerate to around 8% in 2023-24 from 7% in 2022-23.

“We expect India to be the fastest-growing economy among major G20 countries… Government capital expenditure and strong domestic consumption will underpin India’s economic growth. Moreover, India is poised to benefit from increased global trade and investment opportunities arising from companies’ strategies to diversify away from China,” the rating major said in an outlook report on India’s banking sector.

The firm expects India’s inflation rate to decline to 5.5% in 2023-24 from a peak of 6.7% in 2022-23, and noted that further disinflation will support monetary policy easing, going forward.

Moody’s growth estimate for this year is higher than the 7.6% estimate projected by the National Statistical Office (NSO) in its second advance national income estimates released on February 29. On March 6, Reserve Bank of India Governor Shaktikanta Das said that real GDP growth is likely to be closer to 8% as the NSO’s current estimate of 5.9% GDP growth for the final quarter of the year may be overshot.

Government capital expenditure and strong domestic consumption will underpin India’s economic growth. Moreover, India is poised to benefit from increased global trade and investment opportunities arising from companies’ strategies to diversify away from China, it said.

“We expect India’s inflation rate will decline to 5.5% in 2023-24 from a peak of 6.7 per cent in fiscal 2022-23, and further disinflation will support monetary easing going forward,” it said.

With regard to the banking sector, the report said, non-performing assets (NPAs) will continue to fall as the operating environment improves.

The system wide NPA ratio dropped to 3.2% as at September-end 2023 from a peak of 11.2% at the end of March 2018 because of recoveries and write-offs of legacy problem loans.

Slippage ratios — or the ratios of newly accredited NPAs to total standard assets during a period — will stay low, helped by India’s strong economic growth, it said.

“We expect banks’ Common Equity Tier 1 ratios to decline 50-80 basis points because of increase in risk weights for exposures to NBFCs and unsecured retail loans,” Moody’s said.

(with inputs from PTI)

The Monetary Policy Committee (MPC) of the Reserve Bank of India on August 10 decided unanimously to keep the policy repo rate unchanged at 6.50%. 
| Photo Credit: The Hindu

The Monetary Policy Committee (MPC) of the Reserve Bank of India on August 10 decided unanimously to keep the policy repo rate unchanged at 6.50%. 

Announcing the bi-monthly monetary policy on Friday, RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 6.5 per cent.

The Governor said the real GDP growth for 2023-24 is projected at 6.5%. The latest CPI inflation projection for 2023-24 is at 5.4%, the same as projected previously. Indian forex reserves stood at $586.9 billion as on September 29.

Mr. Das said inflation is likely to ease in September, and the MPC would remain watchful of inflation and remain resolute in aligning inflation to the targeted level. Near-term inflation to soften on lowering of vegetable price and reduction in cooking gas cylinder rate, he added.

Domestic economy exhibits resilience on the back of strong demand, the Governor added.

Private sector capex is gaining ground as suggested by production of capital goods, he said.

The transmission of 250 basis point repo rate cut is still incomplete, the RBI Governor said.

The indications are that food inflation may not see sustained easing in Q3, the Governor added.

RBI may have to consider open market operation with regard to G-secs to manage liquidity, Mr. Das said.

RBI also has decided to double the gold loan under the bullet payment scheme to ₹4 lakh for Urban Cooperative Banks. The Payment Infrastructure Development Fund scheme has been extended by two years to December 2025. Internal Ombudsman Scheme to be further fine-tuned to safeguard the interest of customers, the Governor said.

The government has mandated the RBI to keep CPI inflation at 4 per cent with a margin of 2 per cent on either side.