$4 trillion GDP: India’s ambitions of becoming a $5 trillion economy appear within reach. Chief Economic Advisor V Anantha Nageswaran recently said the economy is “sort of crossing” the $4 trillion threshold in the current financial year — an encouraging indicator amid global uncertainty, tariff risks and geopolitical friction. Growth has held up, tax collections are buoyant, inflation is less volatile than a year ago, and external balances remain stable despite global turbulence.
But headline numbers hide deeper weaknesses. India’s economic expansion is real, yet incomplete. Inequality remains high, job creation is uneven, and the demographic dividend is slipping. Without tackling these structural gaps — in employment, human capital, state capacity and energy security — India’s push towards developed economy status will remain aspirational.
READ | Neuromorphic chips can cut AI energy use and boost speed
Growth momentum and its limits
India remains one of the fastest-growing large economies. High-frequency indicators reinforce the narrative: GST collections show double-digit growth; PMI surveys reflect steady activity in manufacturing and services; and credit growth remains strong across retail, MSMEs and services. Urban consumption is supported by formal job creation and stable income flows, while public capital expenditure continues to anchor investment demand.
Yet the picture is not uniform. Rural consumption remains fragile, a concern in an economy where two-thirds of the population resides outside cities. Private sector capital expenditure has not matched rising profits. Real estate demand is concentrated in premium and mid-income homes, with limited traction in affordable housing. The recovery remains urban, narrow and consumption-led, with insufficient momentum in investment-led growth.
Inflation, external risks and energy dependence
Inflation has eased from its 2022 highs, but food prices remain volatile. Pulses, cereals and vegetables continue to push inflation expectations up. The Reserve Bank of India’s “higher for longer” stance reflects its preference for macro stability over aggressive demand stimulus. The approach has worked, but it does little to revive weak consumption at the bottom of the income pyramid.
Exports show a mixed picture. Electronics, pharmaceuticals and services have performed well, but labour-intensive sectors like textiles, garments and engineering goods face weak external demand. India’s large dependence on oil imports remains a structural vulnerability. Cheap Russian crude has offered temporary relief, but geopolitical pressures from the US complicate India’s energy strategy and raise questions over long-term resilience.
Human capital: India’s underpowered growth engine
The debate on growth often focuses on GDP numbers, but India’s long-term trajectory depends on its people.
Human capital remains the weakest link in the country’s growth story. Learning outcomes across states continue to lag, as highlighted by the National Achievement Survey, with persistent gaps in foundational literacy and numeracy. India spends about 2.9% of GDP on education — well below most major economies — and less than 2% of GDP on health, one of the lowest among G20 countries.
Weak public health systems and widespread malnutrition reduce productivity and create long-term economic drag. The recent NFHS-5 shows that childhood stunting remains stubbornly high in several states. These are not mere social-sector setbacks; they are constraints on future growth.
Female labour force participation remains low despite rising education levels. Millions of educated women remain outside the workforce because of care burdens, safety concerns and limited job opportunities. Without greater participation of women, India cannot achieve labour force depth comparable to East Asian economies that saw their strongest growth phases alongside rising female employment.
Human capital will determine whether India reaps or forfeits its demographic dividend. At present, the risks of forfeiture are rising.
State capacity: The missing variable
India’s growth story is often narrated in national terms, but the reality is that states drive economic outcomes.
State finances are strained, with high committed expenditure — salaries, pensions, interest payments — squeezing out space for developmental spending. Rural roads, local public health, school quality, agricultural extension, policing and urban governance are state subjects; the quality of these services varies widely.
Urban governance presents another bottleneck. Municipalities lack financial autonomy and rely heavily on state transfers. India’s cities generate much of its economic output but remain constrained by weak planning, outdated land regulations and underfunded public transport. Without stronger municipal institutions and predictable financing, India’s urbanisation will remain suboptimal.
Judicial delays, slow contract enforcement and regulatory unpredictability also reflect weak state capacity. These institutional shortcomings raise the cost of doing business and depress private investment. Productivity improvements depend as much on governance reforms as on financial incentives like the Production-Linked Incentive schemes.
The uneven capacity of states — fiscal, administrative and institutional — will determine how inclusive and durable India’s next phase of growth will be.
The unemployment and inequality challenge
Employment continues to be India’s most stubborn structural challenge. Formal sector payroll data and EPFO registrations show incremental improvement, but the gains remain uneven. Services absorb most of the new workforce, while manufacturing has not scaled to create mass employment. India needs 8 million new jobs every year for the next decade — a target far from secure.
Inequality deepens the challenge. India is one of the world’s most unequal societies: 1% of the population holds about 40% of national wealth. Persistent income and wealth concentration curbs consumption, limits mobility and undermines the promise of broad-based growth.
Broader reform is the next frontier
India must widen the base of economic opportunity. Rural incomes need support through irrigation, climate-resilient crops, dairy and fisheries productivity, and improved market linkages. Urban growth must become more inclusive through affordable housing, mass transit and better pathways to high-productivity jobs.
Manufacturing must deepen beyond assembly. PLI schemes have created momentum, but productivity gains and supply-chain depth are essential to capture global value chain shifts. Climate adaptation — heat resilience, water security, coastal protection — needs central placement in development planning as climate risks begin to reshape economic outcomes.
Crossing the $4 trillion mark is a meaningful milestone, but it does not answer the questions that matter most:
Can India educate its young? Can it equip them with skills? Can states deliver public services consistently? Can the country generate jobs at scale?
The answers will determine whether India reaches the next stage of development. A $5 trillion economy matters little if prosperity remains concentrated and opportunity remains scarce. Growth must be more inclusive, more productive, and more resilient. Only then will India’s rise be broad-based and durable.