Sanjeev Ahluwalia | Clouds Over the Horizon Amid Blue Skies in India

India ended the year 2025 on a strong note. Growth is stable and upward inclined towards that elusive target of stable eight- plus per cent per year. In the first four decades after 1951, the average annual real growth rate was only 4.2 per cent. It episodically crossed 7.0 per cent in just five years and 9.0 per cent in two years, but was never sustained in the succeeding year.

After 1992, growth consolidated. It was only over the succeeding quarter-century, from 1992 to 2014, that an average annual growth rate of 6.1 per cent was achieved. There were just three episodic annual downturns of sub 4 per cent growth and another three when it crossed 8 per cent. Compare this with the decade following 2014. Barring the two years during the Covid-19 pandemic 2019-2021, the average annual growth was 7.4 per cent in the five years prior to the pandemic and 7.2 per cent in the four years after. India has the momentum now for 8 per cent-plus stable growth although it remains a doable, stretch target. India’s annual growth of 6.5 per cent in 2024 was the highest in the Indo-Pacific region behind Vietnam, which clocked 7.1 per cent. In 2024-25 India’s growth is anticipated at 7.5 per cent with an upside in the succeeding year.

India’s fiscal metrics are respectable. The Centre’s fiscal deficit is on a visible path down to the norm of 4 per cent of GDP, down from 9.2 per cent during the Covid pandemic. The total public debt is about 81 per cent of GDP in 2024 (IMF) versus 66 per cent in South Africa, 95 per cent in Brazil and 205 per cent in China. India became part of the JP Morgan Global Bond Market Index for emerging economies in 2024, with a 1 per cent share, which increased to 10 per cent in 2025. This ensures greater global visibility to India investment risk metrics. The stock market is vibrant and supported by hot domestic inflows eager for quick returns, on the back fuelled of a liberal credit policy with interest rates primed to decline further if the existing low inflation trend (based on low food prices) holds up. At end 2025, despite high volatility during the year, stock market levels were a substantial 15 per cent higher than the previous year.

Spot the clouds. First, India’s low industrial competitiveness. India was compelled to voluntarily exit from RCEP, a trade bloc extending to one-third of global GDP. The reason was the perceived threat to domestic industry from imported, cheap, manufactured goods originating in China and often transhipped from captive Chinese investments entities in Southeast Asia. The rival trade bloc CPTPP, which doesn’t include China and from which the US withdrew in 2017, has fewer advantages, and accounts for an 18 per cent share in global GDP. Decades of protection dulls innovation and entrepreneurship.

Enhancing domestic competitiveness is the key. Lagging infrastructure capacity was a big handicap, resulting in high double-digit logistics costs. The good news is that logistics costs have now declined to a globally competitive 7.9 per cent of GDP. Add to this the thrust towards AI and enhanced digitalisation, including via Central Bank Digital Currencies (CBDC), for which pilots are ongoing under RBI supervision, and there is hope that industrial competitiveness can improve. Lower logistics cost will benefit medium and small industries the most. These account for 40 per cent of India’s exports, one-third of industrial output and 30 per cent of GDP. This will hopefully dilute industry’s opposition to rationalising import safeguards.

The second cloud is uncompetitive agriculture. Excess or disguised unemployment amounts to about one-third of India’s workforce. Politically, the BJP finds it difficult to implement agricultural reforms. It lacks a historical link with rural areas. Prime Minister Narendra Modi has compensated by unleashing a river of benefits for about 100 million rural families, including annual cash support of Rs 6,000 per family. State governments, not to be left behind, piggyback with their own cash transfers which, in some southern states, can reach Rs 13,000 per family per year.

Sadly, agriculture has not been liberalised or commercialised. Individual farmers remain weighed down by the preference for a cereal-based (wheat, rice) cropping cycle, principally because of a long history of administered cost-plus pricing for state procurement of more than one-third of the cereal crop coming to the market. This is a price support mechanism. But export bans, when domestic cereal retail prices are high, add to the business risk. Below-cost supply of production inputs like fertiliser, electricity and irrigation water negatively impact state budgets. More generally, the gap between inefficient farming practices and market-determined factory production is stark.

The third cloud is political. Two-thirds of India is rural. Any politician who manages to liberalise agriculture by navigating the complicated negotiations between farmers, traders and farm labour interests and ensures a fair deal, will also rule the hearts and minds of Indians. Party structures feel disinclined to empower a single person for rural transformation. The rural vote bank is sizable. It can elevate perceived benefactors to positions of permanent power to potentially rule India. Both the BJP (and earlier the Congress) are urbanised parties, short on leaders who have the patience or the inclination to grapple with rural political economy dynamics.

Union governments in India are colonial by instinct and design. Delhi’s Rajpath earlier, and Kartavya Path today, is sceptical of home-grown solutions and deep reform of grassroots institutions and processes. The continued neglect of democratic, administrative and fiscal empowerment at the panchayat level, where two-thirds of Indians live, and of cities where the remaining Indians live, is evidence of a centralised power-dominated colonial mindset. Statism trumps community decisions.

The fascination with global reform models, popularised by the World Economic Forum community, based on global trade in services and manufactured goods which promise quick results, leave no mind-space for a time-consuming, granular process of deep rural transformation.

The ensuing permanent economic drag and continued degradation of latent, rural, human potential is hitting back as constraints on the demand for consumption goods, a narrow personal tax base which limits government revenues and distorts consumption choices via high indirect tax rates, very high government payouts for social services, higher than necessary public investment in industrial infrastructure and, most worryingly, the continued alienation of the bottom half of India from the fruits of economic prosperity. Unlock rural potential for sustained growth.

The writer is Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank