India’s GDP Growth: Challenges and

Opportunities

The National Statistics Office (NSO) announced in late August,

2023 that India's Gross Domestic Product (GDP) had surged in the
April-June quarter, showing an impressive annual growth rate of
7.8%. This remarkable economic performance prompted
widespread excitement and enthusiasm, as it reaffirmed India's
status as the fastest-growing major economy in the world.

What has been the Growth Trajectory in the Past?

▪ Mid-2000s: Indian GDP grew at an annual 9% rate in the
mid-2000s as historically high world trade growth lifted
all economies.
o A financial sector-real estate-construction
bubble added froth to that growth which was
unsustainable.
o Growth slowed to 6% after the global financial
crisis of 2007-08 as world trade decelerated
quickly.
▪ 2012-15: By 2012-13, GDP growth had fallen to about
4.5%, but growth for that year and the next three jumped
courtesy of a data revision in January 2015 (The
Government started calculating GDP on market
price instead of factory price).
o This change in methodology increased the GDP
growth rate in numbers but not in real.
 ▪ 2016-2018: The slowdown resumed after
the demonetisation and GST rollout. And once the
finance-real estate bubble collapsed following the IL&FS
bankruptcy in 2018, GDP growth came down to 3.9% in
the year before the pandemic.
▪ Pre-Covid Years: In fact, the pre-Covid growth was more
dire than the publicized estimate implies.
o Indian statistical authorities present income
from production as their measure of GDP.
• In principle, expenditure on Indian
products (by national residents and
foreigners) should equal
income because producers earn
incomes only when someone buys their
wares.
• But expenditure grew at a
mere 1.9% in the pre-Covid
year.
▪ The Covid Years: By that averaging method, GDP grew
by 2.9% in the pandemic year.
o The slowdown from the heady 9% GDP growth
in the mid-2000s to 3%-4% before the pandemic
reflected severe weakness in demand.
• That weakness manifested in the
glaring drop in private corporate fixed
investment from a peak of 17% of GDP
in 2007-8 to 11% in 2019-20.
• Private corporations cut back
investments, recognising that domestic
consumers, fearful of job and earning
prospects, had constrained purchasing

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 power, and foreigners had only a
limited appetite for Indian goods.
▪ Post-Covid Years: In the post-Covid-19 years,
the economy has bounced around. It fell sharply,
recovered modestly, slowed severely, and experienced a
dead cat bounce from late-2022.
o The only way to assess this bouncy post-Covid
phase is by determining the average growth rate
over the entire period.
o Even that is not straightforward. If we consider
the latest four quarters over the four quarters
before Covid, the annual growth rate (of the
income and expenditure average) is 4.2%.
o If we compare only the latest quarter over the
quarter before Covid, the annual growth is just
above 2%.
o The tell-tale sign of post-Covid demand
weakness is the further drop in private
corporate investment to 10% of GDP in 2021-
22.
• Analysts believe that it has remained
anaemic in 2022-23.
What are the Primary Reasons behind Decline in
Growth Rate in Past Years?
▪ A Weak External Demand: External demand is another
important source of economic growth, as it reflects the
competitiveness and integration of the economy with the
world. However, India's exports to GDP ratio has been
declining since 2013-14. The ratio was 25% in 2011-12
and declined to 18% by 2019-20.

3
 o This fall can be attributed to various reasons,
such as a slowdown in global
growth, appreciation of the rupee, loss of
market share, and trade barriers.
▪ Low Capital Investment: India's investment rate fell from
39.8% of GDP in 2010 to an estimated 29.3% in 2021.
This reflects a lack of confidence and demand in the
economy, as well as structural bottlenecks such as land
acquisition, environmental clearance, and credit
availability.
▪ Policy Uncertainty and Shocks: The government has
implemented several policy changes and reforms that
have had mixed effects on the economy. Some of these
include demonetization, GST, corporate tax cuts,
insolvency and bankruptcy code.
o While some of these may have long-term
benefits, they also caused short-term
disruptions and uncertainties for businesses
and consumers.
▪ Rising Inequality and Poverty: India’s economic growth
has not been inclusive or equitable. The income share of
the top 10% of the population has increased from 31% in
1980 to 56% in 2016, while the share of the bottom 50%
has fallen from 24% to 15%. The poverty rate has also
stagnated at around 20% since 2011.
▪ Poor Performance of the Manufacturing Sector:
Manufacturing is a vital sector for economic growth, as it
contributes to value addition, exports, and employment.
However, India’s manufacturing sector has been
underperforming for the past decade, with its real gross
value added (GVA) declining by about 3% in 2019-20.

4
 o This decline can be attributed to various
reasons, such as demonetisation, GST
implementation, global trade tensions, and lack
of competitiveness.
▪ A Decline in Consumption: Consumption is another
major component of GDP, as it reflects the purchasing
power and living standards of the people. However,
India’s consumption expenditure (as a share of GDP) has
also fallen from 60.5% in 2019-20 to 57.5% in 2021-22.
o This decline can be attributed to various
reasons, such as low income growth,
high inflation, rural distress, job losses, and
reduced credit availability.
▪ Reduced Savings: To maintain consumption, households
have slashed their savings rates to 5.1% of GDP, from
11.9% in 2019-20. Those eligible for credit cards are
racking up worrying levels of debt.
What are the Positive Factors that Can Help India
Recover from the Slump?
▪ A Large and Young Population: According to reports,
India has a population of over 1.4 billion people, with
more than 40% below the age of 25. This provides a
huge demographic dividend for economic growth, as it
implies a large and growing workforce and consumer
base.
o However, this also requires adequate
investment in human capital development, such
as education, health, and skills.
▪ A Resilient and Diversified Economy: India has a
diversified economy that spans across various sectors
and regions. This provides a cushion against sector-

5
 specific or region-specific shocks and helps maintain
macroeconomic stability.
o Moreover, India has shown resilience in coping
with various crises in the past, such as
the global financial crisis of 2007-08 and
the Covid-19 pandemic of 2020-21.
▪ A Reform-Oriented and Proactive Government: The
Indian government is committed to pursuing reforms and
policies that can enhance economic growth and
development.
o Some of the recent initiatives taken by the
government include the Atmanirbhar Bharat
package, the production-linked incentive
scheme, the national infrastructure pipeline and
the labour code bills.
• However, these initiatives also require
effective implementation and
coordination among various
stakeholders.
What more needs to be done to make India's Growth
Rate more Robust?
▪ Boosting Investment and Consumption: These are the
two main drivers of domestic demand, which accounts
for about 70% of India’s GDP.
o To increase investment, the government can
continue to implement reforms that reduce
policy uncertainty, regulatory hurdles, interest
rates, and bad loans.
o To increase consumption, the government
can support income growth, inflation control,

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 rural development, job creation, and credit
availability.
▪ Enhancing Manufacturing and Exports: These are the
key sources of value addition, employment, and external
demand, which can help India diversify its economy and
integrate with the global market.
o To improve manufacturing and exports, the
government can continue to implement
initiatives such as the Atmanirbhar Bharat
package, the production-linked incentive
scheme, and the national infrastructure pipeline.
o The government can also address issues such
as currency appreciation, market share loss,
and trade barriers.
▪ Investing in human capital and social services: These
are the essential factors for improving the living
standards and productivity of India’s large and young
population.
o To invest in human capital and social services,
the government can continue to implement
programs that enhance education, health, skills,
nutrition, water, sanitation, energy, housing, and
healthcare.
o The government can also ensure that these
programs reach the people who actually need
them and are delivered efficiently.
▪ Maintaining Macroeconomic Stability and Resilience:
These are the necessary conditions for sustaining
economic growth and coping with various shocks and
uncertainties.

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 o To maintain macroeconomic stability and
resilience, the government can continue to
pursue prudent fiscal and monetary policies that
balance growth and inflation objectives.

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