Unlocking the growth potential

The Indian economy is a good performer among emerging economies, with +6.2% growth on average over 2000-2019 and +6.9% over 2010-2019 (roughly in line with emerging Asia). However, the Covid-19 crisis hit India badly and the economy was already in a vulnerable state at the end of 2019. A partial recovery was thereafter delayed by a renewed outbreak of Covid-19. Despite a moderation in growth in 2022, India’s economy remains resilient and outpaced the average growth rate among emerging economies and Asian economies. Thereafter, Indian growth bounced back and reached +7.7% in 2023, exceeding expectations. A moderation in growth in 2024 (likely +7%) resulted in part from slower private consumption due to high costs of living and fiscal consolidation. We expect growth to edge down further in 2025 and 2026 but remain at a solid level at +6.4%. Despite uncertainties in the global environment, public spending, foreign investment and easing inflation will be tailwinds. Over the longer run, we expect India to become the second-largest economy in the Asia-Pacific region by 2030. Five game-changers could shape India’s mid-term economic outlook: foreign investment, trade, human capital, climate change and geopolitics.

In terms of public policies, the fiscal deficit has declined slightly since the Covid-19 years and should continue to gradually do so in 2025 and 2026. Among other things, broadening the tax base and strengthening tax compliance will help consolidate the public finances. On the monetary side, after policy tightening to contain inflation (+250bps of cumulative policy rate increases between May 2022 and February 2023), we expect the Reserve Bank of India (RBI) to pivot to cutting the policy rate in 2025 (-50bps likely over the year) as inflation is likely to approach its 4% target. This will help ease financial pressure on households and businesses.

India’s business environment is below average in our assessment of 185 economies, with little change in recent years. The Heritage Foundation’s ‘Index of Economic Freedom’ survey in 2023 assigns India rank 131 out of 184 economies (slightly deteriorated from 126 in the 2022 survey), reflecting good scores with regard to the tax burden, government spending, business and monetary freedoms though weaknesses remain in particular with regards to fiscal health, investment freedom, financial freedom, government integrity and property rights. Meanwhile, the World Bank Institute’s annual ‘Worldwide Governance Indicators’ survey indicates scores since 2019 that have stagnated in the control of corruption and the rule of law and slightly improved in regulatory quality and government effectiveness (all roughly in the 45-60% percentile range). Our proprietary ‘Environmental Sustainability Index’ puts India at rank 153 out of 210 economies, slightly higher than its 172 rank in the previous year, reflecting better performance in energy use per GDP and CO2 emissions per GDP, but weaknesses in terms of climate change vulnerability, renewable electricity output and the recycling rate.

The ruling Bharatiya Janata Party (BJP) obtained a significantly reduced majority following the general elections held in 2024. This thinner margin has required the BJP to form a coalition government, which has slowed the government’s ambitions to pass market-friendly reform and will make the timing and scope of these reforms longer and less predictable. However, Narendra Modi, prime minister since 2014, remains the dominant figure in the government. Although his popularity remains high, his party could potentially face credible political opponents if regional parties make it to the national level. Nevertheless, the stability of this government is unlikely to be challenged in the coming few years. We would watch out for possible episodes of the BJP intensifying its Hindu nationalist agenda, potentially generating communal clashes, and the potential emergence of rival political parties.