Economy weathered West Asia shock. Now, reform for sustained growth (Op-ed by Sajjid Chinoy)

Why in the News

India’s gross domestic product (GDP) growth for the last quarter is expected to print close to 8 per cent, defying fears that the West Asia conflict had dented the economy. This follows a joint fiscal, monetary and regulatory stimulus through 2025, direct tax cuts, a Goods and Services Tax (GST) rationalisation, and an effective 150 basis point policy rate cut, combined with a swift diversification of energy imports during the conflict. The pickup is largely cyclical, and the investment rate, corporate capital expenditure (capex) and structural export and employment growth remain too weak to sustain the expansion once the stimulus fades.

What explains India’s growth resilience through the West Asia conflict?

1. A joint stimulus in 2025: Direct taxes were cut in February, GST was rationalised in September, and policy rates were cut by an effective 150 basis points along with regulatory easing in the financial sector.
2. Non-oil export acceleration: Exports have picked up on the back of a near 15 per cent depreciation of the real effective exchange rate (REER), the trade weighted, inflation adjusted value of the rupee against a basket of currencies, since 2025, a reduction in United States tariffs, and resilient global growth.
3. Swift energy diversification: India sourced crude from Russia and liquefied natural gas from the United States and Oman to prevent shortages, importing 17 per cent more energy than normal last quarter, while the government absorbed the bulk of the oil price shock through the fisc to insulate the private sector.

Why does India’s investment rate remain a structural concern?

1. Fixed investment stagnant: Fixed investment remains near its decadal average of 32 per cent of GDP and has not lifted despite rising public investment and real estate capex.
2. Corporate capex has not picked up: Corporate capex continues to languish around 10 to 11 per cent of GDP, and balance sheets of the top 1,000 listed companies show no discernible pickup in 2025-26.
3. Central capex is slowing: Central capex grew 30 per cent between 2020 and 2023, then slowed to 11 per cent in 2024 and just 1.6 per cent in 2025, as tax cuts absorbed fiscal space.
4. State capex under pressure: Cash transfers on demand are pushing state capex growth below nominal GDP growth.
5. Weak demand visibility: Capacity utilisation has stayed in the 75 to 76 per cent range for a decade, and rising Chinese overcapacity is discouraging corporate investment.

Why are consumption and export growth not yet structural?

1. Weaker growth than the earlier export led cycle: Post-pandemic private consumption and exports grew at about 5 per cent, against the 16 per cent export growth between 2003 and 2012 that had crowded in private capex.
2. Service export growth has halved: Service export growth in nominal dollars has fallen to 8 per cent over the last year from 16 per cent over the previous four years, and employment across major IT firms has stayed flat.
3. Employment mix is shifting toward self-employment: The Periodic Labour Force Survey shows India’s employment rate rising, but a significant share of new jobs are self-employed rather than salaried, even as the mix improved in 2025.
4. Consumption is credit fuelled: Non-Banking Financial Company lending to households is growing at 20 per cent and unsecured personal lending momentum has risen to 25 per cent, on the back of rising household leverage.

What must change for the growth cycle to become structural?

1. Labour must become more competitive against capital: India’s capital-labour ratio has risen for over two decades, and reversing this needs education, skilling and health investment, alongside rationalising labour laws that raise the cost of labour.
2. Exports need structural competitiveness: Goods exports have fallen from 17 per cent of GDP a decade ago to 11 per cent, and further gains need tariffs and non-tariff barriers rationalised and overregulation reduced.
3. Private capex is the real crowding-in mechanism: Structurally higher consumption and exports are what would draw in a sustained private capex cycle, which in turn would crowd in foreign direct investment and stabilise the balance of payments.

Conclusion

The current cyclical strength, backed by clean corporate and financial balance sheets and a sustained agricultural surplus, is a bridge over the West Asia shock, not a destination. Unless investment, exports and employment turn structural, the growth cycle will not sustain once the fiscal and monetary stimulus fades, and the piece warns there is little time left to act given global automation, trade fragmentation and a fraying international order.

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