Targeting Higher Growth Rate for India

• 14 May 2025

For Prelims: World Bank, Female labor force participation, Gross Domestic Product  Middle-Income Trap, India's economic growth outlook, India's economy 

For Mains: Key Challenges Hindering India’s Higher GDP Growth, Strategy for Higher Growth Rate, India’s path to becoming a high-income economy, Middle-income trap and its implications for India  

Source: BS 

Why in News? 

India’s Gross Domestic Product (GDP) growth has largely hovered around 6% from 2000 to 2025, with the exception of a brief 8% period between 2006 and 2010, which is often referred to as the "6% GDP growth trap.” 

• Breaking this ceiling calls for structural reforms, tech investment, human capital development, and sustainability. 

What is the Current State of the Indian Economy? 

• GDP Growth: IMF projects India's GDP growth at 6.2% in 2025 and 6.3% in 2026, making it the fastest-growing major economy. 
• Foreign Investment & Forex Reserves: Forex reserves rose to USD 688.13 billion in May 2025, nearing the all-time high of September 2024. 
• Infrastructure: Operational airports increased from 74 (2014) to 159 (2025), 50 new airport projects are planned till 2030. India is one of the world's fastest growing civil aviation markets. 
• Manufacturing: Capacity utilization reached 75.3% in 2025, indicating strong industrial activity. This suggests factories are operating near potential, reflecting robust demand and likely encouraging private investment. 
• Employment: In 2024, India’s overall unemployment rate declined slightly to 4.9% (from 5.0% in 2023), with rural unemployment falling to 4.2% and urban unemployment stable at 6.7%. This indicates a gradual improvement in employment conditions, especially in rural areas. 

What are the Key Challenges Hindering Higher GDP Growth Rate in India? 

• Low Investment and Job Creation: Over the past 25 years (2000-2025) India's investment-to-GDP ratio has fallen from 39-42% (between 2006 & 2010) to 33% (2023), with private investment dropping from 18% to 9.8%. This has slowed down economic growth, capacity expansion, and job creation.  
  • Also there has been a decline in employment elasticity of investment ( i.e. fewer jobs are created for each unit of investment) from 0.44 in 2000s to 0.21 in 2023.  
    • This is due to capital-intensive sectors like infrastructure and automation absorbing most investments, limiting large-scale job creation. 

• Fiscal Constraints & Inefficient Public Spending: A significant portion of the government’s revenue (around 25%) goes to interest payments on public debt, limiting fiscal space for crucial investments in sectors like education and infrastructure.  
  • India's tax-to-GDP ratio  remains low at 11.7%, compared to over 24% in countries like the UK, France, and South Africa which restricts resource generation.  
    • Further inefficient public spending, driven by misallocation and bureaucratic delays, reduces the effectiveness of policies in sectors critical for growth. 
• Infrastructure Gaps & Trade Barriers: India’s logistics cost is estimated at 14-18% of GDP (Economic Survey 2022-23), compared to the global benchmark of around 8%, due to factors like poor road connectivity, port congestion, and fragmented supply chains. 
  • The export-to-GDP ratio (19.5%) is also low due to high tariffs and trade barriers, coupled with slow-paced trade agreements, limiting access to global markets for Indian products, especially for small businesses. 
• Social & Institutional Weaknesses: Economic growth is concentrated in urban sectors, leaving rural areas, especially agriculture, behind.  For example, the top 10% hold 77% of wealth, while the bottom 50% share only 13% of national income. 
  • Corruption and institutional inefficiencies contribute to these disparities, with India ranked 96th on the Corruption Perceptions Index (2024). 
• Global and External Factors: India’s growth is impacted by global uncertainties, including geopolitical tensions (e.g., the Russia-Ukraine war), economic slowdowns in major economies (e.g., US, China), and oil price fluctuations.  
  • Its dependence on foreign investment makes it vulnerable to external shocks, as seen during the global financial crisis and pandemic disruptions. 

What are the Key Drivers of Growth in the Indian Economy? 

• Domestic Demand & Consumption: India’s large consumer base and urbanization drive demand, particularly in FMCG, e-commerce, and automobiles. Rural consumption is bolstered by agricultural output and government schemes.  
  • Private consumption grew by 6.9% in Q3 FY25, while rural FMCG sales rose 4% in April-June 2024. 
• Infrastructure & Capital Expenditure: Infrastructure projects under  National Infrastructure Pipeline (NIP), Gati Shakti, and Bharatmala are stimulating economic activity.  
  • The FY25-26 budget allocated Rs 11.21 lakh crore for capex, enhancing logistics and urban infrastructure. Capex grew at a 38.8% CAGR from FY20-FY24 (Economic Survey 2024-25). 
• Digital Economy & Fintech: India’s digital economy accounted for 11.74% of GDP in 2022-23. UPI transactions reached a record Rs 23.48 lakh crore in January 2025. These all are boosting business efficiency and tax compliance. 
• Manufacturing Growth & Supply Chains: PLI schemes and a focus on high-value manufacturing (electronics, semiconductors, EVs) are boosting the sector. Electronics exports reached USD 23.6 billion in FY23, with mobile phones making up 43%.  
  • Geopolitical tensions in the Red Sea and Suez Canal are disrupting trade routes, prompting firms to adopt the China+1 strategy and shift supply chains to India. 
• Services Sector: India’s services sector, led by IT and fintech, continues to be a major growth driver. Services exports grew 12.8% in FY25, up from 5.7% in FY24, reinforcing India’s position in global outsourcing. 
• Energy Transition: India is focusing on renewable energy and green hydrogen.  As of October 2024, renewable energy capacity reached 203.18 GW, accounting for 46.3% of total installed capacity.  
  • India aims for an USD 8 billion green hydrogen market by 2030. 
• Fiscal and Monetary Stability: Prudent fiscal policies and stable monetary measures ensure macroeconomic stability.  
  • The fiscal deficit is expected to decline to 4.9% of GDP in FY25, while retail inflation eased to 4.9%, despite food inflation at 8.4%. 

What Steps Should be Taken to Achieve Higher GDP Growth? 

• Boost Private Investment & Promote Job-Rich Growth: There is a need to focus on labour-intensive industries like textiles and apparel, leather and footwear, food processing.  
  • Incentivize investment through zero import duties on key inputs to reduce input costs for domestic manufacturers, removal of non-tariff barriers, and improved ease of doing business. 
  • Promote FDI in sector-specific areas (e.g., Swiss in food, German/Taiwanese in leather) to drive domestic investment and job creation. 
• Reform Fiscal Policy: Raise the tax-to-GDP ratio up to 15% by simplifying tax rates, phasing out exemptions and broadening the base.  
  • Launch strategic disinvestment to reduce debt and interest payments (currently 25% of revenue), and redirect funds to growth-oriented social sectors like infrastructure, education, and healthcare. 
• Expand Exports & Trade Access: Strengthen trade agreements with the EU, US, and UK, eliminate non-tariff barriers like Quality Control Orders (QCOs) and align standards with global practices.  
  • Encourage export-oriented FDI (such as in textiles, electronics, food processing, and automotive components) to improve competitiveness, facilitate technology and quality upgrades, and increase India's export-to-GDP ratio with a target of at least 25%.

What Measures can India Adopt to Sustain Resilient Economic Growth Amid Rising Global Uncertainties? 

Click Here to Read: Measures for India to Sustain Resilient Economic Growth 

Conclusion 

A policy mix of targeted investment incentives, trade and tax reforms, and prudent fiscal management can help India break out of the 6% growth trap. Achieving sustained 8%+ growth is essential not only for poverty reduction but for enabling large sections of the population to enter the middle class.

Drishti Mains Question:

What are the key challenges hindering India's economic growth, and what strategic measures should be adopted to achieve a sustained higher growth rate?

UPSC Civil Services Examination, Previous Year Questions (PYQs)  

Prelims

Q. India’s ranking in the ‘Ease of Doing Business Index’ is sometimes seen in the news. Which of the following has declared that ranking? (2016)

(a) Organization for Economic Cooperation and Development (OECD)  
(b) World Economic Forum  
(c) World Bank  
(d) World Trade Organization (WTO)  

Ans: (c) 

Q. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if: (2018)

(a) Industrial output fails to keep pace with agricultural output.  

(b) Agricultural output fails to keep pace with industrial output.  

(c) Poverty and unemployment increase.  

(d) Imports grow faster than exports.  

Ans: (c)  

Q. In a given year in India, official poverty lines are higher in some States than in others because: (2019)

(a) Poverty rates vary from State to State  

(b) Price levels vary from State to State  

(c) Gross State Product varies from State to State  

(d) Quality of public distribution varies from State to State  

Ans: (b) 

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Mains 

Q.1 “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy capable of increasing the industrial growth rate? (2017)  

Q.2 Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis the industry in the country? Can India become a developed country without a strong industrial base? (2014)