Bullish outlook on Indian economy is simplistic as well as unrealistic

Almost any economy can grow at 8% for few years. Sustaining that pace for decades is far rarer and requires policy continuity, relentless implementation, and the ability to correct course when needed

A beguiling theory is doing the rounds in India’s financial circles — that the country’s stock market has become unusually attractive for foreign investors; if only the billion-dollar global funds with the best of talent wised up, they can grow their investment eight times in dollar terms over the next two decades. 

 

According to this theory, India will enter a prolonged period of high growth, low inflation, and minimal currency depreciation, thanks to continued structural reforms, improved labour productivity, higher female labour-force participation, transition from an informal to a formal economy, and deeper credit penetration. Foreign investors would miss this “golden age” prosperity at their own peril. 

 

This proposition rests on two heroic assumptions. First: India can sustain an 8 per cent annual growth rate for decades. Second: Inflation will remain subdued enough to prevent meaningful depreciation of the rupee. 

 

That easy 8% growth

 

In theory almost any economy can grow at 8 per cent for a few years. Doing so for decades is far rarer. It requires policy continuity, relentless implementation, and an ability to correct course when things go wrong. India faces several structural frictions. The most immediate is the weakness of private capital expenditure. During the boom preceding the 2008 global financial crisis, the country’s investment rate rose to almost 38 per cent of gross domestic product (GDP), supporting several years of rapid expansion. Since then it has slipped back to the low 30s. Public spending on infrastructure has risen sharply, but government investment alone cannot replicate the dynamism of a broad private-investment cycle. Many firms remain cautious, wary of uneven demand and an uncertain global environment.

 

Second, a large share of India’s workforce remains tied to agriculture, a sector that generates a far smaller share of national output. Manufacturing historically absorbs surplus rural labour during periods of rapid development. Countries such as South Korea and China achieved sustained growth above 8 per cent by shifting millions of workers to factories and export industries. India’s expansion, by contrast, has leaned heavily on services, which employ a smaller slice of the workforce. The result is an economy that grows respectably without generating enough formal, high-productivity jobs.

 

Educational attainment has improved, yet the quality of schooling and the alignment between skills and industry needs remain uneven. Meanwhile, the machinery of the state — though capable of executing ambitious reforms — often struggles with the slower work of implementation. Regulatory complexity, patchy contract enforcement, and administrative fragmentation across states can delay projects and deter investors. Even after the introduction of goods and services tax (GST), intended to knit the country into a single market, businesses still grapple with compliance burdens and bureaucratic complexities.

 

Infrastructure has improved in recent years, particularly in roads, airports, and digital payments. Yet bottlenecks persist in logistics, urban planning, and electricity distribution — areas that influence productivity across the economy. India’s urbanisation quality also remains relatively modest for a country at its income level, limiting the productivity gains that dense cities typically generate. Financial markets present another constraint. Although the banking system is healthier than it was a decade ago, access to long-term project finance remains limited and the corporate bond market is still shallow.

 

Finally, India’s earlier growth surge coincided with a period of buoyant global trade and capital flows. Today’s world is marked by slower trade growth and rising geopolitical tensions, which complicate efforts to expand export-led manufacturing. The country’s growth story, therefore, rests increasingly on domestic reforms and investment. Without faster progress in shifting labour out of agriculture, strengthening human capital and reviving private investment, sustaining growth at 8 per cent will remain an aspiration rather than a baseline.

 

Inflation vs rupee

 

The second pillar of the “golden age” theory is that low inflation will prevent the rupee from depreciating meaningfully against the dollar. An analysis of the relationship between the annual depreciation of the rupee against the dollar and the annual consumer price index (CPI) inflation rate from 2000-24 reveals a weak to moderate positive linear correlation, with a Pearson correlation coefficient of approximately 0.31. Only 9-10 per cent of the variation in rupee depreciation can be linearly explained by inflation alone. Other key influences include global commodity prices (especially oil imports), capital flows and foreign investment trends, trade imbalances, monetary policy differentials between the Reserve Bank of India (RBI) and the US Federal Reserve, the RBI’s active foreign-exchange intervention to manage volatility, and external shocks like geopolitical events or global risk aversion. For instance, episodes of sharp depreciation often align more closely with capital outflows or oil price spikes than with purely domestic inflation trends, while periods of rupee appreciation (negative depreciation) have occurred amid strong inflows even when inflation was moderate. 

 

The vision of effortless prosperity — 8 per cent growth, low inflation, and a steadily strong currency — is appealing. But as an investment thesis, it is charmingly simplistic. Foreign investors, who have real money at stake and have sold Indian equities worth nearly $20 billion over the past 14 months, may appreciate the complexities better. They will certainly return when the arithmetic improves, not because armchair economists have declared a “golden age”.

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The writer is cofounder of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers