India’s growth: Fast but uneven

INDIA’S economy grew by 7.8 per cent in the April–June quarter of 2025, exceeding expectations and reinforcing its position as the world’s fastest-growing major economy. This marks the second consecutive quarter of strong performance and comes at a time when several advanced and emerging economies are struggling with uneven recoveries.

The significance of these numbers lies not only in the pace of growth but in its persistence. Compared to 6.5 per cent a year ago, the latest figures reflect both resilient domestic demand and the cumulative impact of reforms undertaken over the past decade. India is now the world’s fourth-largest economy, and on current projections could surpass Germany by 2028 and Japan by 2030, reaching a GDP of $7.3 trillion. But sustaining this trajectory will depend on how effectively the country addresses underlying structural constraints.

Multiple Drivers, Not a Single Engine

The growth is broad-based. Services remain the strongest contributor, expanding by 9.3 per cent in Q1. Trade, transport, finance, and public services all posted gains, underscoring the continued centrality of services to India’s economy. Industry has also strengthened: manufacturing grew by 7.7 per cent and construction by 7.6 per cent, buoyed by infrastructure spending and demand recovery. Even agriculture, traditionally a drag on headline growth, accelerated to 3.7 per cent, offering relief to rural incomes.

Industrial production data for July show signs of momentum, with output rising 3.5 per cent compared to 1.5 per cent in June, led by metals and electrical equipment. While these are modest numbers in isolation, they suggest that supply-side bottlenecks are gradually being eased.

This balanced spread across sectors contrasts with earlier growth cycles where expansion leaned disproportionately on services or favourable monsoons. It makes the current recovery more durable, though still exposed to shocks in any one sector.

Policy Outcomes, Not Just Cyclical Recovery

The latest figures reflect more than a cyclical rebound. Public capital expenditure, which touched `10.52 trillion in 2024–25, has laid the foundations for future growth. By prioritising infrastructure over short-term subsidies, the government has attempted to crowd-in private investment, and early signs indicate that capacity utilisation is rising.

Tax reform through the Goods and Services Tax, despite early disruption, has broadened the formal economy. Eight years on, GST has 1.52 crore registrations, with growing female participation in ownership. Upcoming reforms in October 2025, aimed at easing compliance and lowering rates for essentials, will test whether the system can become more efficient and less distortionary.

Inflation has provided some unexpected relief. Consumer prices fell to 1.55 per cent in July, the lowest since 2017, with food inflation turning negative. While this eases pressure on households and the Reserve Bank of India, policymakers must guard against deflationary risks in rural areas if farm incomes weaken.

Labour indicators also point to improvement. Female participation has increased, particularly in rural India, and unemployment has fallen to 3.2 per cent over the past decade. Yet headline figures mask concerns: many of the new jobs remain informal or low-productivity, and quality employment creation has not kept pace with the 12 million young people entering the workforce each year.

Investment, Capital Flows, and External Endorsement

Foreign direct investment has held firm, with inflows of $81 billion in 2024–25 and cumulative inflows crossing $1 trillion since 2000. India’s foreign exchange reserves, close to $700 billion, provide a measure of resilience against external volatility. Encouragingly, domestic institutional investors are becoming an equally important force in equity markets, reducing dependence on fickle foreign flows.

Global agencies have taken notice. S&P upgraded India’s sovereign rating for the first time in nearly two decades, citing improved growth fundamentals, while Fitch affirmed a stable outlook. These endorsements suggest greater confidence in India’s ability to deliver sustained expansion with macroeconomic stability.

Reform Dividend and Remaining Gaps

Flagship programmes have shaped this momentum. The Production Linked Incentive scheme has drawn substantial investment into manufacturing, particularly electronics. Digital India has expanded connectivity, with nearly 97 crore internet users, and financial inclusion through Jan Dhan Yojana has widened the base of formal banking. Together, these initiatives indicate a more diversified model that relies not only on consumption but also on investment and productivity gains.

Yet the gaps are visible. Inequality remains entrenched, with rural areas heavily reliant on agriculture and vulnerable to weather and price shocks. Job creation, while improving, is skewed towards low-wage and informal segments. Fiscal space is narrowing: capital expenditure is commendable, but rising subsidies and potential oil price spikes could challenge sustainability.

Navigating Risks

Three priorities stand out if India is to maintain 7–8 per cent growth over the decade.

First, human capital: Education and skilling must match the needs of an economy where both services and manufacturing are expanding. Without this, demographic advantage could turn into a liability.

Second, urbanisation: Nearly half the population will live in cities by 2035. The pace and quality of urban infrastructure will determine whether growth translates into improved living standards or deteriorating conditions.

Third, innovation: India has ambitions in AI, 6G, and advanced manufacturing, but research spending remains below 1 per cent of GDP. Without significant investment, technological sovereignty will remain aspirational.

India’s 7.8 per cent growth in the first quarter of FY 2025–26 is a reminder of its resilience and potential. It also highlights the dividends of structural reforms, inflation control, and public investment. At the same time, the numbers cannot obscure persistent weaknesses: inequality, uneven job quality, and external vulnerabilities.

The challenge for policymakers is to convert a favourable quarter into a sustainable decade. Growth will be judged not just by speed but by inclusivity, quality of jobs, and the strength of institutions that underpin it. For now, India’s position as the fastest-growing major economy is secure. Whether that translates into durable prosperity is the question the next few years will answer.