India’s Road to Resilient Economic Growth

India's September-quarter GDP growth of 8.2% has exceeded expectations, driven by manufacturing (9.1%) and services (9.2%), with private consumption rebounding to 7.9%. However, this surge may be deceptive, a record $41.68 billion trade deficit, potential export front-loading ahead of U.S. tariffs, and an unusually low GDP deflator below 1% raise questions about sustainability. The growth remains concentrated in capital-intensive and formal sectors, while labor-absorbing industries and rural consumption continue to struggle. The challenge lies not just in maintaining growth rates, but in ensuring they translate into broad-based economic prosperity. 

Which Factors are Shaping and Strengthening India’s Current Economic Growth Trajectory? 

• Strategic Manufacturing Deepening (PLI Impact): India is moving beyond mere assembly to high-value component manufacturing, driven by the maturity of Production Linked Incentive (PLI) schemes in electronics and pharmaceuticals.  
  • This structural shift is reducing import dependency for critical intermediates like PCBs and active pharmaceutical ingredients, creating a resilient domestic industrial base that is less vulnerable to global supply chain shocks. 
  • For instance, Manufacturing grew at a robust 9.1% in Q2 FY26, significantly outpacing the general economy; PLI schemes have realized actual investments of over ₹1.46 lakh crore as of August 2024, transforming India into a net exporter of mobile phones. 
• Rural-Led Consumption Resurgence: A distinct "decoupling" is visible where rural demand is currently outpacing urban consumption, fueled by above-normal monsoons and stabilizing inflation which has restored purchasing power in the agrarian economy. 
  • This revival is crucial as it broadens the consumption base beyond the metro cities, creating a more sustainable domestic demand engine for FMCG and two-wheeler sectors.  
  • Rural consumption expanded by 7.7% in Q2 FY26, the highest in 17 quarters, while India's FMCG sector saw sales growth slow in Q3, with volume up 5.4% due to GST changes.  
    • Rural markets led expansion at 7.7%, effectively acting as the primary driver for private final consumption expenditure (PFCE) growth. 
• Capex-Led Infrastructure Multiplier: The government’s aggressive front-loading of capital expenditure continues to crowd in private investment, particularly in logistics, railways, and defense, creating a high economic multiplier effect.  
  • This sustained public spending is removing historical supply-side bottlenecks, reducing logistics costs, and ensuring that industrial output can reach global markets competitively.  
  • The Union Government's capital expenditure on key infrastructure sectors has grown at a rate of 38.8% from FY20 to FY24, signaling strong investment confidence despite global headwinds. 
• Digital Public Infrastructure (DPI) 2.0 & AI Integration: The narrative has shifted from basic digital access to "intelligent" application, where AI and data analytics built on top of the India Stack (UPI, ONDC) are democratizing credit and market access for MSMEs. 
  • This "formalization via digitization" allows small enterprises to access collateral-free loans and global markets, unlocking productivity in the massive informal sector.  
  • As on January, 2025, GeM has clocked a GMV of ₹4.09 lakh crore, which marks a growth of nearly 50% over the corresponding period last FY.  
  •  With the AI & analytics technology implementation rate of 54%, Indian companies are revolutionising their operational methodologies using machine sensors, cloud technology, robotics and automation (Invest India). 
• Geopolitical "China Plus One" Realization: India is actively capitalizing on the global diversification of supply chains, attracting high-quality FDI from firms seeking alternatives to China, particularly in tech and engineering.  
  • While merchandise exports face global headwinds, this structural repositioning is turning India into a preferred "friendly shore" for advanced manufacturing, insulating it partly from Western demand slowdowns.  
  • India has overtaken China as the most attractive emerging market for investing, according to 85 sovereign wealth funds and 57 central banks. 
• Green Energy Transition as an Economic Driver: The shift to renewables is no longer just environmental but economic, with massive investments in solar and green hydrogen reducing the long-term current account deficit caused by fossil fuel imports. 
  • This transition is creating a new parallel economy of green jobs and manufacturing, specifically in solar modules and battery storage, decoupling growth from carbon emissions.  
  • As of June 2025, the country has already achieved 235.7 GW from non-fossil fuel sources, comprising 226.9 GW of renewable energy and 8.8 GW of nuclear power, accounting for 49% of the total installed power generation capacity of 476 GW.  
    • This marks a significant step toward India’s decarbonisation goals and its pledge to a sustainable future, ensuring uninterrupted power for industrial growth. 
• Financial Sector Resilience & Credit Expansion: The "Twin Balance Sheet" problem of the past decade has been largely addressed, with banks now holding pristine books capable of funding the next leg of private corporate capex.  
  • India's banking sector has witnessed continued improvement in asset quality, with the gross non-performing assets (GNPA) ratio dropping to 2.6% of total advances in September 2024, marking the lowest level in the past 12 years, according to the Reserve Bank of India's (RBI) Financial Stability Report. 
  • This financial stability allows for sustained credit flow to productive sectors like infrastructure and housing without the risk of an immediate asset quality bubble.

What are the Major Bottlenecks Still Constraining India’s Economic Growth? 

• Structural "Jobless Growth" & Skill Mismatch: The core constraint remains the inability of the manufacturing sector to absorb the massive influx of workforce, exacerbated by a severe disconnect between academic output and Industry 4.0 requirements.  
  • While GDP soars, the labor market faces "structural hysteresis" where millions of graduates lack the specific technical aptitude required for high-value roles, creating a paradox of high growth with stagnant quality employment. 
  • Youth unemployment (15-29 years) remained stubbornly high at 14.6% in August 2025, while reports indicate only 42.6% of graduates were deemed employable for corporate roles due to non-technical skill deficits. 
• Private Investment (Capex) Lethargy: Despite government front-loading infrastructure spending, private corporate capital expenditure has not fired on all cylinders, driven by risk aversion and uncertain global demand.  
  • Corporations are deleveraged and profitable, yet they are delaying greenfield expansion, relying instead on brownfield efficiencies, which limits the creation of new productive capacity and jobs.  
  • While new project announcements rose, actual private project completions declined by 31% YoY in FY25, and private capex contribution to new projects grew by a marginal 4%, signaling a "wait and watch" approach. 
• Export Competitiveness & Tariff Walls: India’s export engine is sputtering due to a rise in global protectionism and "tariff wars," particularly with the US and EU imposing non-tariff barriers and higher duties.  
  • This external hostility is compounding domestic inefficiencies, causing labor-intensive sectors like textiles and gems to lose market share to agile competitors like Vietnam and Bangladesh.  
    • Merchandise exports showed a contraction of (-)11.8% in October 2025 (EY). 
• MSME Credit Rationing & Tech Deficit: The growth recovery has been "K-shaped," with Micro, Small, and Medium Enterprises (MSMEs) struggling to access affordable formal credit despite digitization efforts. 
  • High collateral requirements and the inability to adopt advanced digital tools rapidly have left this sector, which employs the vast majority of non-farm labor, stagnant and unable to scale up to global value chains.  
  • The credit gap in the MSME sector is around ₹20 lakh crore to ₹25 lakh crore, with about 47% of MSME credit demand remaining unmet, forcing small units to rely on expensive informal borrowing at 12-14% interest rates. 
• Chinese "Dumping" & Import Dependency: A critical bottleneck is the flood of cheap Chinese imports, particularly in steel, chemicals, and electronics, which is undercutting domestic manufacturing viability. 
  • As China faces its own slowdown, it is exporting its overcapacity to India, creating an inverted duty structure where importing finished goods is often cheaper than manufacturing them locally. 
  • In India, most of the electronic component imports came from China (nearly 40%), followed by Hong Kong over (16%) in the first half of fiscal year 2025. Also, global reports confirm China is dumping steel and chemicals at predatory prices. 
• High Logistics & Transaction Costs: India’s logistics cost remains an "invisible tax" on competitiveness, hovering significantly higher than global benchmarks despite improvements in physical infrastructure (roads/ports).  
  • Regulatory compliance burdens and slow turnaround times at hinterland depots continue to erode margins, making Indian goods 10-15% more expensive than competitors in the global market.  
  • Logistics costs are estimated at 7.97% of GDP in 2025, still above the global best practice, dragging down manufacturing competitiveness and preventing deeper integration into Global Value Chains (GVCs). 

What Measures can India Undertake to Achieve Resilient and Sustainable Economic Growth? 

• Accelerate Green Industrial Transformation: India must adopt a calibrated green-industrial strategy that nudges firms toward low-carbon production through predictable regulatory pathways, green-technology clusters, and circular-economy norms.  
  • Strengthening domestic manufacturing of clean-tech components will reduce external vulnerabilities.  
  • Harmonising environmental clearances with real-time digital monitoring can expedite compliant industries.  
    • A green-skills mission can prepare the workforce for emerging sectors. Such calibrated greening ensures competitiveness without compromising growth momentum. 
• Build Shock-Resistant Supply Chains: Enhancing supply-chain resilience requires diversification of sourcing, modern logistics corridors, and resilient warehousing linked through digital dashboards.  
  • Encouraging multi-tier supplier mapping can pre-empt disruptions. Policy support for local supplier development strengthens domestic value chains. Embedding climate-risk assessments in infrastructure planning reduces exposure to extreme events.  
  • This integrated design stabilises production cycles and boosts long-term growth certainty. 
• Deepen Quality of Human Capital: Strengthening human capital calls for modular skilling aligned with evolving industry needs and continuous learning platforms integrated with local economies.  
  • Bridging foundational learning gaps through adaptive pedagogy will enhance long-term productivity.  
  • A wellness-oriented employment framework can reduce workforce attrition. Promoting research talent via flexible mobility between academia and industry strengthens innovation. Such holistic human-capital deepening creates a durable productivity base. 
• Fiscal Recalibration for Long-Term Stability: A resilience-oriented fiscal policy demands broadening the tax base, rationalising expenditure, and embedding outcome-based budgeting.  
  • Improving fiscal transparency through real-time dashboards strengthens investor confidence.  
  • Strategic prioritisation of green infrastructure multiplies long-term returns. Phased consolidation coupled with counter-cyclical buffers enhances stability against global volatility. This calibrated stance preserves growth while managing macroeconomic risks. 
• Technology-Driven Governance and Public Service Efficiency: Embedding digital public infrastructure across sectors ensures frictionless service delivery and reduces administrative leakages.  
  • AI-assisted regulatory systems can enhance compliance, early-warning mechanisms, and sectoral supervision.  
  • Interoperable data platforms promote targeted welfare delivery. Urban governance must adopt sensor-driven resource management to curb wastage. Such tech-enabled governance elevates productivity and resilience across the economy. 
• Boost Innovation-Led Growth Ecosystem: A stronger innovation ecosystem requires flexible regulatory sandboxes, deeper industry–research linkages, and mission-driven R&D programmes in frontier technologies.  
  • Incentivising domestic IP creation can accelerate commercialization cycles. Creating regional innovation districts linked with universities builds distributed innovation capacity.  
  • Streamlined startup compliance fosters experimentation. An innovation-driven economy is inherently more adaptive and future-proof. 
• Strengthen MSME Competitiveness and Formalisation: Enhancing MSME resilience requires streamlined compliance, unified digital portals, and risk-based regulatory norms to reduce operational friction.  
  • Cluster-based upgradation with shared technology centres can boost productivity and innovation.  
  • Strengthened credit-flow through cash-flow based lending and improved receivable management reduces vulnerability to liquidity shocks.  
    • Promoting formalisation via simplified taxation and digital bookkeeping deepens market access. 
    • A calibrated MSME-capability mission can transform them into engines of sustainable and inclusive growth. 

Conclusion: 

India’s current growth momentum reflects a mix of structural strengths and emerging vulnerabilities. While strategic manufacturing, rural consumption revival, infrastructure investment, and digital integration are driving resilience, challenges like jobless growth, MSME credit gaps, and global trade headwinds persist. Sustainable and broad-based prosperity will require deepening human capital, green industrialisation, supply-chain resilience, and innovation-led policies. Targeted MSME support and technology-enabled governance can ensure that high GDP growth translates into inclusive, long-term economic strength. 

Drishti Mains Question: Examine the key drivers of India’s economic growth and the structural challenges that constrain its sustainability and inclusiveness. Suggest measures to strengthen resilience and broad-based development.