 "Economy")
Speaking at the Kautilya Economic Conclave in Delhi, the Union Finance Minister Nirmala Sitharaman is reported to have alluded to the enormous resilience the Indian economy has acquired in the face of global turmoil by firmly anchoring economic growth in domestic consumption. This was re-emphasised by the Reserve Bank of India (RBI) governor, who stated that the country has settled well into a resilient growth equilibrium, defying all odds to provide stability in a volatile global environment.
Surely, these statements infuse a lot of confidence, particularly in the wake of enormous uncertainty caused on the external front by global conflicts and the Trump tariffs. However, we need a reality check. Complacency about our ability to accelerate growth to reach a developed country status by relying solely on domestic consumption to anchor the process is misplaced. Rather than taking the current developments as a given, it is necessary to see the challenge posed by the prevailing situation as an opportunity and respond effectively to make the economy competitive.
Indeed, dependence should not be allowed to turn into compulsion, but the solution lies in engaging actively with the world by acquiring enough strength. This is necessary not only to earn global respect as an economic power to be reckoned with, but also to enhance the welfare of the people of the country.
Surely, India has, over the years, acquired resilience against both external shocks and internal uncertainties. Externally, it has traversed far from being grouped among the “fragile five” to achieving health and a stable economic environment, and is now counted among the fastest-growing large economies. It has successfully anchored uncertainties caused by international conflicts, including volatility in commodity prices, shortages of essential raw materials, and supply chain disruptions. With a strong and stable financial system, the country has acquired sufficient immunity from global financial uncertainties. Even domestically, the economy is no longer susceptible to the vicissitudes of monsoon failures and supply shortages. Growth and stability have been a hallmark of India even when the global environment has been turbulent.
Not surprisingly, the RBI has upgraded the growth estimate for 2025-26 to 6.8 per cent from the previous forecast of 6.5 per cent. This is on the back of an accelerated growth estimate for the first quarter at 7.8 per cent, compared to 6.5 per cent recorded in the first quarter of the last financial year and 7.4 per cent in the previous quarter. In the remaining three quarters, gross domestic product (GDP) growth is estimated at 7 per cent, 6.4 per cent, and 6.2 per cent, respectively. Thus, even as there was a certain apprehension about the growth prospects after the imposition of tariffs, used as a weapon by the United States, the upward revision in the growth estimate reaffirms the resilience of the economy.
However, the concern with growth trends during the last few years is that their main anchor has been domestic consumption demand. Even as the government has tried to increase capital expenditure with the hope of crowding in private investment, the trend in private investment demand continues to remain subdued. Rather than investing within the country, there has been a surge in overseas direct investment by Indian companies. According to RBI data, Indian corporate overseas investment grew by 40 per cent in 2024–25 to reach $36 billion.
Sole reliance on domestic private consumption cannot provide a durable solution to growth acceleration, and it is important to ease the constraints on other engines of growth. This requires policy introspection.
There is a lurking fear that domestic consumption and the turbulent, often offensive, international environment could push India towards an autarchic economic policy regime, which would be disastrous. We cannot continue to live in the comfort zone, content with 6.5 per cent growth if we have to reach the aspirational target of achieving developed-country status in the next two decades. We may advance the rhetoric about “Atmanirbhar Bharat”, but we should remember that no country in the world has succeeded in maintaining high growth over long periods by shielding itself from global competition. The use of tariffs as a weapon by the US administration is likely to do considerable harm, particularly to labour-intensive industries, and it is not easy to diversify trade in the short term. Hopefully, this is a passing phase, and trade negotiations will help settle a more reasonable outcome. Nevertheless, policymakers should take this as a wakeup call and treat the challenge it poses as an opportunity to reform.
Further acceleration in growth requires an increase in investment and its productivity. Gross domestic capital formation has virtually been stagnant at 30-31 per cent of GDP, and there is no evidence of a reduction in the capital-output ratio either. An increase in productivity is important not only to enhance the global competitiveness of the Indian economy but also to provide quality products to domestic consumers. We should realise that protectionism is a tax not only on exporters but also on domestic consumers. The only ones to gain by taking “Atmanirbhar Bharat” to the extreme are inefficient domestic producers, who will dish out inferior products to consumers under the protective umbrella. It is appealing to indulge in rhetoric and raise emotions, but the real challenge is to introspect deeply to ensure that efficiency does not suffer.
As I have mentioned in my previous columns, India must take the challenges presented by the international environment as an opportunity to initiate reforms. The reforms should not merely scratch the surface but be more fundamental. The core policy interventions needed involve reforms to labour and land markets. Fiscal consolidation will have to continue to reduce the cost of capital, as the household sector’s net financial saving is just about 5.1 per cent. Public investments will have to be sustained by financing them through a revival of the disinvestment and privatisation programme. More importantly, public administration reform is crucial to ensure the rule of law, protect property rights, and enforce contracts in an expeditious manner. While we can continue to talk about self-reliance, we should not shy away from hard-nosed reforms.
The author is chairman, Karnataka Regional Imbalances Redressal Committee. He was a member of the Fourteenth Finance Commission, and a former director, NIPFP. The views are personal
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
