Big Challenges Lurk Behind India’s World-Beating Growth
As Finance Minister Nirmala Sitharaman prepares to present the annual budget this Sunday, India’s economy appears strong on the surface.
The country is on track to end the financial year with 7.3% growth, surpass $4tn (£2.97tn) in GDP, and overtake Japan as Asia’s second-largest economy. Retail inflation remains below 2%, agriculture output is robust, and government granaries are well stocked—supporting rural incomes. Income tax cuts and GST rationalisation last year have boosted consumer demand and spending. The Reserve Bank of India (RBI) has described this combination of high growth and low inflation as a “Goldilocks” phase, reflecting an economy expanding at a healthy, sustainable pace.
Yet beneath these headline numbers, significant challenges persist.
Unemployment remains a concern, with high demand for unstable gig work. India’s five largest IT companies added only 17 net employees in the first nine months of 2025, highlighting weaknesses in the labour market. White-collar hiring is slowing amid AI-driven disruption, while labour-intensive export units continue to face crises.
Trade pressures also loom. The US 50% tariffs have weakened exports to America, and although recent free trade agreements (FTAs), including with the European Union, may help, India still faces stiff competition from countries like Vietnam and Bangladesh.
Private investment remains weak, despite rapid GDP growth. Corporate investment has “flatlined” since 2012, hovering around 12% of GDP, as factories operate with excess capacity. Foreign investment is minimal, just 0.1% of GDP, far below the 4% seen in booming Asian economies like China and Vietnam. Labour code reforms may improve the business climate, but attracting foreign capital remains uncertain.
Against this backdrop, Sitharaman is expected to focus on two pillars in the budget: reforms and fiscal discipline. Potential measures include expanding production-linked incentives, supporting MSMEs and exporters, increasing capital outlays for defence, and lowering customs duty slabs to boost trade.
The government’s infrastructure spending—over $100bn annually on roads, railways, and telecom over the past four years—is likely to continue, keeping capital expenditure stable at around 3% of GDP. At the same time, last year’s tax cuts for the middle class have widened the deficit, so the focus will likely remain on maintaining or gradually reducing it.
“While fiscal expansion is unlikely, we forecast the finance minister will refrain from further consolidation,” said Nuvama Securities. “A big stimulus is improbable as the government remains committed to reducing the debt-to-GDP ratio by 1% annually until FY31, signalling a continued focus on deleveraging.” (Agencies)
