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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former governor of the Reserve Bank of India
India surprised forecasters last year. While much of the global economy slowed under the weight of high interest rates and geopolitical uncertainty, the world’s most populous country grew upwards of 7 per cent. Inflation has fallen sharply, and the external deficit remains modest. For investors and policymakers accustomed to India’s boom-and-bust cycles, this combination of growth with stability has revived an old but consequential question: has the Indian economy finally shifted on to a structurally higher growth trajectory?
There is a plausible case that something has changed. India has long oscillated between two uncomfortable states: rapid expansion accompanied by inflation and external imbalances, or macroeconomic stability achieved at the cost of slower growth. Recent performance appears to sit between these extremes.
Improved macroeconomic management is part of the story. India formally adopted inflation targeting in the past decade, and monetary policy has since been more predictable and transparent. Fiscal policy, while hardly tight, has become more credible, with an explicit medium-term consolidation path and a sharper distinction between day-to-day spending and public investment. On the external front, India is less reliant on foreign capital to finance growth than in the past — an important change for a country with a history of balance-of-payments pressures.
Structural reforms reinforce the optimistic reading. A nationwide goods and services tax has reduced internal trade barriers in what was once a fragmented market. New bankruptcy rules have disciplined creditor behaviour and improved capital reallocation, even if enforcement remains uneven. Perhaps most striking for outsiders is India’s digital public infrastructure. National biometric identification, real-time payments and interoperable digital platforms have sharply lowered transaction costs, deepened financial inclusion and strengthened the state’s ability to deliver services.
There are also early signs that India’s supply side has become more responsive. Large public investment in roads, ports and logistics has eased bottlenecks that once caused growth accelerations to spill quickly into inflation. Targeted incentives have begun to attract manufacturing investment into electronics, renewables and other tradeable sectors. If supply can respond more smoothly to rising demand, higher growth need not be destabilising — a prerequisite for any lasting structural shift.
Yet the counter-arguments are formidable. The most obvious weakness is private investment. Corporate balance sheets are healthier than a decade ago but risk appetite remains subdued. An economy cannot sustain a higher growth trajectory on public spending alone; it has to fire on all cylinders.
More worrying is the prospect of jobless growth: weak employment growth relative to the pace of output expansion, particularly in manufacturing. Household income growth has lagged headline GDP numbers, limiting broad-based consumption. A true structural shift would show up not only in aggregate output, but in better jobs and rising productivity for the majority of workers.
The headline macro data also warrants caution. The current low-inflation environment partly reflects favourable food prices and benign global commodity conditions, which can reverse quickly. Real GDP growth has been flattered by a low GDP deflator that does not reflect the prices people experience in the marketplace, overstating gains in purchasing power. Meanwhile, the narrow current account deficit is caused by weak capital inflows — an unusual and potentially fragile combination that has kept the currency under pressure.
History suggests restraint in over-optimism. India has experienced apparent structural accelerations before, only for them to fade when global conditions turned or domestic imbalances resurfaced. Genuine regime shifts are visible not just in favourable macroeconomic aggregates, but in sustained improvements in productivity, employment and export competitiveness. On these measures, the evidence remains mixed.
Has India entered a structurally higher growth phase? The most defensible answer is — provisionally. The economy appears better able than before to grow without immediately colliding with inflation or external payments pressures. But the transition is incomplete and fragile. If private investment revives, job creation accelerates and productivity gains broaden, today’s performance will be seen as the early evidence of a new growth regime. If not, it will be remembered as a benign interlude.
There is cause for cheer, but not yet for celebration.
