India is projected to maintain its status as the world’s fastest-growing major economy in 2025, fueled by both domestic and external factors. According to a statement from the statistics ministry, the country’s gross domestic product (GDP) grew by 6.2 percent in the three months leading up to December 2024.
While forecasts for the Indian economy indicate a growth rate of 6.5 percent in 2025, attaining the higher rates necessary to compete with China’s economy poses a considerable challenge. To realize its ambition of becoming a developed nation by 2047, India must achieve an annual growth rate of 8 percent or more. Meeting this goal will require the government to implement comprehensive economic reforms to capitalize on geopolitical convergence, an approach Indian leadership seems hesitant to adopt.
India’s economy today
Over the past three decades, India has steadily drawn global attention with its significant economic potential. With a labor force of 600 million, a rapidly expanding middle class and a strategic geographical position, the country has become a magnet for foreign investment. In 2022, India achieved the milestone of becoming the fifth-largest economy in the world and projections indicate that it will climb to the fourth position by 2026. Furthermore, India may soon surpass China as the leading global manufacturing hub.
Yet, despite retaining its title as the world’s fastest-growing major economy, India’s expansion has slowed to its weakest pace in years – down from a decade-long average of 7 percent to just 5.4 percent annually. This is primarily due to a sluggish manufacturing sector, persistent food inflation of over 8 percent, stagnant job growth, a rising trade gap, disappointing capital flows and weak urban consumption. In fact, in February, the newly appointed governor of the central bank cut interest rates for the first time in nearly five years to boost a slowing economy.
These economic strains spilled into the political arena during the June 2024 general elections. The decline in the number of seats won by the ruling Bharatiya Janata Party coalition was thought to mirror the dissatisfaction among voters arising from economic hardships. Extensive welfare payments, benefits and subsidies to over 800 million people have helped the government curb popular unrest.
On February 1, 2025, Finance Minister Nirmala Sitharaman unveiled her eighth budget, introducing tax cuts for the middle class as a strategic move to shore up political support. These tax cuts will likely have a limited effect as only about 1.6 percent of Indians pay income taxes – mainly due to the large informal economy and many people earning below the basic tax exemption limit. So, while these cuts may boost short-term output by encouraging increased consumption among the middle class, they will not suffice without more significant reforms.
Therefore, India’s economic growth is expected to remain modest without deeper changes. The double-digit growth rates from 2008 to 2012 stemmed from the liberalization reforms of the 1990s, while the average growth rate of around 7 percent since then reflects the consequences of poor policy decisions.
India’s economic struggles predate the Covid-19 pandemic that shook the world in 2020. Before that crisis, the poorly thought-through demonetization policy of 2016 and the hasty rollout of the Goods and Services Tax in 2017 had already strained the economy. The pandemic marked a turning point, plunging modern India into its first recession with a 7 percent contraction in 2020.
However, from this low point, geopolitical shifts have started favoring India. Companies in the United States and other Western countries now see India as an appealing alternative to China for their manufacturing needs. As a result, India has emerged as a thriving hub for global capability centers, focusing on research, development and consultancy services. Once again, outsourcing has come to the rescue, echoing the country’s resurgence in the 1990s.
Structural challenges
India is struggling to break free from the middle-income trap. The 1990s reforms drove significant growth for two decades, but maintaining that momentum now requires a fresh wave of changes. Political hesitation, however, is stalling critical reforms in factor markets – land acquisition, the labor market and the capital market – all of which are essential to the production process. This reluctance is proving increasingly costly, holding back the nation’s ability to capitalize on its economic promise.
One of India’s greatest assets is its labor force, a major draw for foreign companies. Yet, its distribution reveals a structural imbalance: Over 44 percent of the workforce is engaged in agriculture, while only 31 percent work in services and 25 percent in industry. This skew traces back to the socialist mixed economy established post-independence, prioritizing capital-intensive growth over labor-intensive manufacturing. As a result, policy has long focused on supporting micro, small and medium-sized enterprises in manufacturing rather than promoting large, export-oriented factories.
To foster large-scale enterprises, the government must overhaul land acquisition and labor laws that currently favor unions. India faces a pressing jobs crisis, with an unemployment rate of 4.2 percent and youth unemployment soaring to 15 percent, as 10 to 12 million young people enter the job market annually. Boosting large-scale manufacturing could provide a long-term solution by creating millions of jobs. By harnessing economies of scale to produce export-ready goods, India could establish itself as a major player in the global supply chain.
However, instead of clearing these bottlenecks to spur industrial hiring, successive governments have turned to large-scale construction projects – ports, roads and railways – as a quick fix for employment, sidestepping deeper reforms. This approach continues in the most recent budget, where the central government has introduced 50-year interest-free loans for states, allowing them to invest more in infrastructure development.
Despite being the most populous country in the world, India’s labor force still lags behind that of China. While the country has a vast labor pool, it faces a significant skills gap. Only about 10 percent of India’s workforce is skilled, which pales in comparison to the 60 percent found in most developed nations, including China. The latest budget launched the National Manufacturing Mission. But it is unlikely to yield swift results unless similar initiatives are adopted nationwide, including in the private sector.
Tied into all this is India’s long-standing policy of indigenization and the quest for self-sufficiency. This approach, in place for nearly 77 years, took its latest form in 2014 under Prime Minister Narendra Modi’s “Make in India” initiative. At the time, he aimed to raise manufacturing’s share of GDP to 25 percent. But 11 years later, that goal has only drifted further away: Manufacturing’s contribution has slipped from 17 percent to just 13 percent of GDP, the lowest since 1967. This decline persists despite New Delhi’s consistent efforts to roll out production-linked incentives and reduce import duties for key sectors like textiles, smartphones and electronics.
For a country as large as India, it is quite surprising that the services sector, not manufacturing, accounts for more than half its GDP. Since the 1990s, various Indian governments have envisioned that the growth of services would compensate for the shortcomings in manufacturing and help boost employment.
The recent budget launched a fund to drive early-stage investment in startups. According to NITI Aayog, the government’s think tank, India’s gig economy might provide jobs for as many as 23 million people by 2030. Nevertheless, that is hardly a substitute for the employment potential of large-scale manufacturing.
India’s agricultural sector also requires reforms, but implementing these changes is challenging due to political and electoral considerations. In 2020, the government attempted to introduce three new farm laws without engaging in public or parliamentary discussions. Farmer protests against the laws, across many states nationwide, began in August 2020 and lasted over a year. In November 2021, Prime Minister Modi repealed the laws after violence related to the protests and failed negotiations between the government and farmers.
Further complicating matters, Indian agriculture heavily relies on rain-fed irrigation, which has been significantly affected by climate change. The country’s agricultural productivity lags behind that of its peers. In response to these issues, the government has launched a national mission to develop high-yielding crop varieties to improve productivity.
Amid these internal struggles, India finds itself in need of increased foreign investment. After years of robust inflows, however, the trend has reversed in recent times. In 2008, foreign direct investment (FDI) accounted for 3.6 percent of GDP, but this figure dropped to 2.4 percent by 2020 and just 0.8 percent in 2023. By December 2024, gross FDI – which includes reinvested earnings and equity inflows – plummeted to $71 billion in 2023-2024, marking the lowest level in five years.
The economic softening has also hit financial markets hard. After having risen for years, the country’s stock markets saw almost all their gains wiped out in the last half of 2024. As of February 2025, India’s benchmark indices experienced their fifth consecutive monthly loss, marking the longest losing streak since 1996. As a result, India has become the worst-performing global stock market. Moreover, the Indian rupee continues to depreciate against the dollar.
Promise and impediments
For years, foreign businesses have been drawn to India’s vast labor pool and expansive consumer market. Yet, they frequently face frustration due to inconsistent policies, complex regulations and a lack of fair competition or openness to trade. The Indian government’s heavily regulatory stance leans toward protectionism, with a general wariness of the benefits of global trade. On top of that, India levies tariffs higher than any other Asian nation – a point that has repeatedly drawn sharp criticism from U.S. President Donald Trump, who once dubbed India the “tariff king” during his trade spats, accusing it of unfair practices that hurt American businesses.
This protectionist bent puts India at a competitive disadvantage compared to other investment hubs in Asia. The country must adopt a more open stance and reduce its tariff barriers to integrate into global supply chains. Currently, India’s share of international trade is just 1.8 percent, a figure that has only slightly increased from 1.7 percent in 2014. While India’s support for certain indigenous businesses is meant to bolster homegrown enterprises, it often goes too far, stifling competition, deterring foreign investment and ultimately negatively affecting Indian consumers.