India’s economy has been notably resilient amidst the past year’s global inflation and supply chain constraints, boasting an impressive growth rate of 7.8% in the 2023–24 fiscal year (FY) and exceeding the average G20 rate of 3.4%. Strong growth in the manufacturing sector, higher-than-expected agricultural output, and robust government spending have made India the world’s fastest-growing major economy.
However, according to the OECD’s latest figures, India’s economic growth is projected to slow to 6.6% in FY 2024–25, as global demand weakens and a tighter monetary policy takes shape to manage global inflationary pressures. With inflation and monetary policy expected to ease in the second half of 2024, the Paris-based think tank forecasts that India’s growth rate will remain at 6.6% in FY 2025–26. Although these figures are above the G20 average of 3.1% in both 2024 and 2025, they fall short of the Indian government’s target of 7% to 7.5% by 2030.
This economic context is particularly significant because India’s working-age population will reach its highest level at 68.9% by 2030 (Chart 1). China took full advantage of a similarly high proportion of working-age citizens, resulting in a 9-10% annual growth rate for three decades, and thereby becoming an upper middle-income country by 2010. With less than six years left to benefit from this demographic dividend, India needs to leverage its abundant labor supply to likewise reach its economic potential and lift millions of Indians out of poverty.
Chart 1: India’s Working-Age Population Will Peak in 2030
S&P Global has emphasized that to achieve high and sustainable growth, which is essential for India to fully capitalize on its demographic dividend, it is important for the nation to boost private investment, grow its manufacturing sector, and address bottlenecks related to infrastructure. In three interviews, leading economic experts delve into these critical themes, offering valuable insights into how India can leverage its competitive assets, which will lay the groundwork for long-term growth in FY 2024–25.
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Private Sector and Venture Capital Investment Can Catalyze Growth in Critical Sectors
Before the pandemic, OECD and World Bank figures showed that India’s gross fixed capital formation (investment) rate had declined from 36% in 2007 to 27% in 2019. The vulnerability of India’s financial sector, coupled with its weak export performance and delays in privately funded projects, caused investment to stall in the decade leading up to Covid-19. To improve investment and drive growth post-pandemic, the Indian government prioritized capital expenditure in its recent budgets and supported state governments with loans. These measures have helped India’s gross capital formation to increase by over 11% during FY 2022–23 and are expected to expand by over 10% during FY 2023–24; nevertheless, India’s private sector investments have steadily declined to 10% of the nation’s FY 2022 GDP (Chart 2).
Chart 2: India’s Gross Fixed Capital Formation as % of GDP
Private investors’ lukewarm interest is a concern for India’s long-term economic growth—it indicates that companies are not investing in their futures in the form of, for instance, machines and factories, as initially expected.
Moreover, the Indian government’s high capital spending has brought the fiscal deficit to 5.8% in FY 2023–24 and the combined debt-GDP to above pre-pandemic levels (Chart 3). Unless growth and private-sector investment pick up, the government will struggle to manage this deficit while maintaining its spending on social sectors and welfare schemes, which have been included in recent budgets
Chart 3: India’s Combined Debt-GDP ratio (%)
Shreya Sodhani, Regional Economist at Barclays, says that to revive private-sector investment, “India needs to focus on three key areas: lowering the cost of financing for businesses, building capacity through infrastructure development, and government capex taking a backseat as green shoots become visible on the private side, so as to allow savings to finance private investment.”
She adds that “recent banking sector reforms, improvements to the corporate sector’s balance sheet, and a pick-up in credit growth—often a strong indicator of private investment—in sectors like cement and chemicals have signaled an improvement, and bode well for the near-term outlook for private investment.”
However, Sodhani highlights that for India to capitalize on foreign investors’ interest, particularly in the digital economy and sectors related to manufacturing and consumer tech, “digital infrastructure is an important precursor that needs to continue developing, because it can lay the foundation for investment.” She cites the recent pact between India and the UAE to develop data center projects as an example of this forward-looking approach.
Venture capital (VC) investment also has to be strengthened so that India’s tech and digital economy can develop solutions that enable key sectors such as manufacturing, farming, healthcare, and services to become more efficient and productive. Last year, India’s VC investment fell to 0.4x of 2022, with a 45% reduction in deal volume.
Sodhani notes that “globally, the tech sector faced a downturn, and India was not immune. To boost VC investment, governments in Taiwan and South Korea launched a matching scheme and co-invested in startups to support innovation. This is an avenue worth considering for India because a strong tech sector would not only incentivize VCs to invest but also attract global tech companies to relocate their operations and grow the tech ecosystem in India.”
Lowering Import Barriers and Production Costs are Key to Manufacturing Sector’s Growth
The World Bank reported that India’s manufacturing sector accounted for 13% of its GDP in 2022, a decrease from 17% in 2010. To advance India’s next phase of economic growth, the current government is prioritizing manufacturing with programs such as production-linked incentives and by attracting private capital into the sector. In FY 2021–22, India’s manufacturing exports reached US$418 billion—a growth of more than 40% from the previous year’s US$290 billion, and well above the pre-pandemic growth of 5% to 10%.
However, despite these measures, India’s manufacturing sector faces structural challenges. Several major multinational companies (MNCs) have exited the country, citing an unfriendly business environment, among other reasons. Alicia García-Herrero, Chief Economist for Asia Pacific at Natixis, says that “India’s stringent labor laws, combined with the lack of a skilled workforce, insufficient infrastructure, and high import tariffs, continue to hinder MNCs from establishing a manufacturing base in the country.” She adds, “often, companies are training their workforces from the bottom up, which adds additional costs, especially if the trained worker leaves the company.”
According to García-Herrero, India needs not only to address these structural challenges, but also to leverage other Southeast Asian countries’ blueprints for scaling manufacturing. Vietnam, for instance, has experienced significant growth, with its manufacturing sector expanding from 17% of its GDP in 2010 to 25% in 2022. The key catalysts were Vietnam’s targeted shift towards export-led manufacturing and its participation in the China-ASEAN free trade agreement. This allowed cheap imports into the country and attracted MNCs such as Samsung in 2010, resulting in the growth of industrial jobs (manufacturing and construction) at a compound annual growth rate (CAGR) of 4% and an increase in electronic exports to 11 times India’s within a decade (Chart 4).
Chart 4: Electronics Exports from India and Vietnam in USD Billion
With countries such as the United States, the United Kingdom, Malaysia, Indonesia, and Thailand putting increasing effort into boosting their manufacturing sectors, García-Herrero recommends that “India establish free-trade relationships, upgrade its transport infrastructure quickly, and focus on specialization, where it can compete in areas like chip design and semiconductor packaging within the manufacturing sector. This will reduce import and transportation costs for manufacturing companies, and the specialized approach would help India position itself competitively in the global supply chain.”
On the regulatory front, the transition to a net-zero economy has incentivized many countries and regions, such as the European Union, with its Carbon Border Adjustment Mechanism (CBAM), to impose tariffs on imports of manufacturing products produced from carbon sources. As only 11.5% of India’s energy comes from low-carbon sources, the manufacturing sector would have to pay tariffs or additional fees to Europe, for example, if its production of goods is from Indian fossil fuels. Consequently, García-Herrero stresses, “India should speed up its decarbonization efforts because it would enable manufacturers to export more easily into foreign markets. The costs of producing renewables continue to decrease, and India should take advantage of this trend to enable its manufacturing sector to export into foreign markets like Europe.”
Bottlenecks Related to Infrastructure Projects Need Urgently to be Addressed
Ernst & Young (EY) recently highlighted infrastructure as a crucial component in India’s potential success in becoming a US$26 trillion economy by 2047. With India’s population expected to reach nearly 1.6 billion, its demand for physical, digital, and social infrastructure will continue to grow. In response, the Indian government has established the National Infrastructure Pipeline (NIP) to oversee infrastructure projects and attract private and foreign investors, envisioning a total investment of US$1.4 trillion from FY 2019–20 to FY 2024–25. However, so far, only 21% of the NIP’s capital comes from the private sector (Chart 5), and India only attracts 5% of global private participation in infrastructure (PPI) investments, whereas China attracts 41% (Table 1).
Chart 5: Relative Shares (%) of the National Infrastructure Pipeline
Table 1: Top Five Countries Attracting the Most Significant Private Participation in Infrastructure (PPI) Investments in 1H 2023
Sonal Varma, Managing Director and Chief Economist at Nomura, says that “given India’s size and the intensive nature of its infrastructure projects, the Central government has shouldered much of the investment and increased its budget allocation for infrastructure from a pre-pandemic average of 1.7% of GDP to 3.4% of GDP in the FY 2024–25. This has been accompanied by interest-free loans to states to boost their infrastructure spending.”
But, Varma adds, to incentivize private and foreign investment in India’s infrastructure projects, “procedural delays and regulatory hurdles associated with land acquisition and litigation issues have to be addressed more quickly, preferably through a centralized authority to streamline the process. Alongside, since infrastructure projects have a long time horizon, India also needs to continue its banking sector reforms (Chart 6) to reduce non-performing assets (NPA) in order to bring stability into the sector so financial institutions are better equipped to provide long-term funding for infrastructure projects.”
Chart 6: Gross NPA Ratio of Scheduled Commercial Banks, in Percentage
Moreover, McKinsey underscores the importance of sustainable infrastructure projects, especially with over three-quarters of India projected to still be in development by 2050 (and over 80% by 2070). Varma also notes that “as the global economy looks to meet their net-zero goals, demonstrating commitment towards sustainability is becoming an important benchmark for foreign and private investors, particularly pension funds, looking to invest in India’s infrastructure sector. India already has an excise duty on petroleum products, but a successful rollout of the carbon compliance market in 2026 will support efforts to showcase India’s sustainability commitment and attract infrastructure-related investment.”
In addition to attracting private and foreign investors, India will need to ensure a consistent and reliable supply of metals and minerals to expand its infrastructure. The International Energy Agency has highlighted the geographic concentration of metals and minerals production and the average 16-year timeline for project development from discovery to first production risks a mismatch between demand and the industry’s capacity to bring new projects online globally.
Varma states that to reduce its infrastructure projects’ exposure to risk, “India needs to anticipate needs for the next decade and engage in long-term negotiations with countries where these metals are available in regions like Latin America and Africa. This will help India deliver on project timelines and upgrade the country’s infrastructure to complement the growth of other economic sectors.”
