GS Paper: GS3-01. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

India is projected to sustain GDP growth of 6.5% between FY28-30, positioning it as the world’s third-largest consumer market by 2026 and the third-largest economy by 2028. (UBS)

Arguments Supporting the View (Indian economy in good shape)

High GDP Growth – India remains the fastest-growing major economy. 7% in FY 2025.

Moderating Inflation – Eg- Retail inflation fell to a historic low of 0.25% in October 2025, due to GST rate cuts

Forex reserves at over $689 billion provide external stability.

Fiscal Consolidation Path- Fiscal deficit targeted to reduce to 4.8% of GDP in 2025-26.

Robust Financial Sector- Gross NPAs have declined from 9.11% (2021) to 2.8% (2025).

Production-linked incentives (PLI) has raised India’s manufacturing attractiveness. Eg: Electronics exports at a record $38 billion in 2024-25. (32% increase)

Arguments Against the View (Macro vulnerabilities persist)

Jobless Growth –Service sector contributes 55% of GDP but employs less than 30% workforce

High food inflation due to climate shocks, hurting the poor.

Rural Distress due to weak agriculture real wages and uneven monsoons.

Global slowdown, protectionism, and China’s dominance limit India’s merchandise exports.

High Public Debt- General government debt remains around 82% of GDP (IMF, 2024), limiting fiscal room.

The share of Gross Fixed Capital Formation (GFCF) was about 34.6% of GDP in 2023-24 and slipped to 29.61% of GDP in 2024, indicating weak investment.

Way Forward

Enhance R&D (2.5% of GDP), reduce logistics costs (PM Gati Shakti), and expand PLI schemes to boost manufacturing.

Promote labour-intensive manufacturing (textiles, toys, food processing) and expand services exports (IT, GBS, health tourism).

Improve ease of doing business, accelerate contract enforcement, and reduce regulatory uncertainty to crowd-in private capital.

Strengthen FOREX buffers and expand rupee trade settlement

Encourage domestic production of critical inputs (electronics, APIs, green tech) to reduce vulnerability to global shocks.

As highlighted by the Economic Survey, India must prioritise blue-sky thinking and foster a virtuous cycle of investment to achieve Viksit Bharat@2047.

Potential GDP refers to the maximum sustainable output an economy can produce without generating inflationary pressure, when all resources are fully and efficiently employed.

Determinants of Potential GDP

Labour Force & Human Capital – Size, skill, and productivity of the workforce.

Capital Formation – Investment in infrastructure, machinery, and technology.

Technology & Innovation – R&D and digital transformation driving productivity.

Institutional Quality – Governance, regulatory efficiency, and property rights.

Total Factor Productivity (TFP) – Efficiency in using labour and capital together.

Prevailing Inflation Rate – Persistent inflation distorts real GDP from its potential level.

Global Conditions – Protectionism, trade restrictions, and geopolitical tensions. Eg- Tariff Wars

Factors Inhibiting India from Realizing Potential GDP

Low Female Labour Force Participation – FLFPR only 41.7% (PLFS) against global average of 48%

Slow Capital Formation – GFCF at ~29.6% of GDP (2024) vs 34% in 2023.

Skill Mismatch & Education Gaps – Only 4.7% of workforce formally skilled (NSDC).

Infrastructure Bottlenecks – Logistics cost ~13% of GDP vs 8% in USA

Weak Productivity Growth – Low TFP and informal sector dominance. (83% informal sector)

Regulatory Cholesterol – Delays, compliance burden, weak contract enforcement.

Way Forward

Enhance Human Capital – Invest in education, healthcare, and skill development

Accelerate Investment & Infrastructure Growth through faster project execution under PPP.

Create safe workplaces, flexible jobs, and childcare support to tap women’s economic potential.

Increase R&D spending to 2.5% of GDP (currently <1% of GDP) for productivity gains.

To realize its potential GDP and Viksit Bharat 2047, India must shift from factor accumulation to productivity-driven growth

Gross Domestic Product (GDP) is the total monetary value of all final goods and services produced within a country’s borders in a given period. GDP in India is calculated by the National Statistical Office (NSO).

The post-2015 GDP methodology aims to provide a more accurate, data-rich, and globally comparable picture of India’s economy. To improve reliability, there is a need for greater transparency.