India’s Growth Moment: Cyclical Strength, Structural Test

By global standards, India is the fastest-growing large economy. Real GDP growth has consistently surprised on the upside, fiscal execution has been consistent, and public investment has reached levels that would have been unthinkable a decade ago. Yet beneath the optimism lies a quieter, unresolved debate: is India’s growth structurally self-sustaining, or is it riding a cyclical wave powered disproportionately by the state?

The answer matters because growth narratives shape policy choices. Structural growth permits patience, confidence, and gradual reform. Cyclical growth demands urgency, calibration, and course correction. Mistaking one for the other risks policy complacency at precisely the moment when strategic clarity is required.

At first glance, the case for structural strength appears persuasive. India’s economy expanded at over 7% in real terms even as much of the world slowed. Balance sheets in the corporate and banking sectors are healthier. Supply-side reforms after Covid, including infrastructure push, digital public goods, production-linked incentives, and logistics improvements, have reduced friction across sectors. Few serious observers argue that India is facing a fundamental breakdown of economic capacity.

Yet growth is not merely about how fast an economy expands. It is equally about how it expands. And here, the composition of India’s current growth tells a more complicated story.

Over the past decade, India’s nominal GDP growth has settled near the 10% mark, materially lower than the 14–15% rates seen in the pre-2014 years. Economists correctly note that this moderation is partly cyclical, reflecting a lower inflation environment rather than collapsing real activity. But nominal growth is not a cosmetic statistic. It shapes tax buoyancy, wage dynamics, corporate revenues, and investment psychology. Persistently lower nominal growth alters economic behaviour, even when real growth appears respectable.

More importantly, today’s growth momentum is being driven by two narrow engines: public capital expenditure and upper-income consumption. The government’s infrastructure push has been decisive in preventing a post-pandemic stagnation. Public capex has crowded in activity across construction, steel, cement, and logistics, lifting aggregate demand and supporting employment in capital-intensive sectors. At the same time, consumption at the higher end of the income distribution has remained resilient, supported by formal sector wage growth, financial asset appreciation, and urban service employment.

What is missing is the third pillar that historically sustains durable growth cycles: a broad-based revival of private investment and mass consumption.

Private capital expenditure, despite healthier balance sheets and lower leverage, remains selective. Investment decisions are concentrated in sectors closely aligned with public spending or regulatory incentives. Outside these pockets, capacity expansion is cautious. Firms are not constrained by access to capital or policy uncertainty as much as by demand visibility. When consumption growth is uneven and price power is weak, irreversible investment decisions are deferred.

Consumption itself mirrors this imbalance. Rural demand has shown episodic resilience, but remains vulnerable to agricultural volatility. Urban mass consumption has lagged headline GDP growth, while discretionary spending is increasingly skewed toward higher-income households. This bifurcation allows growth to persist without translating into widespread income expansion or employment elasticity.

This is why India’s current growth phase is best understood as cyclically strong but structurally incomplete. The state has substituted for the private sector in driving demand. Elite consumption has substituted for mass demand. These substitutions are effective in stabilising the economy after a shock, but they cannot become permanent foundations.

Cyclical Not Structural
Public capital expenditure, by design, cannot expand indefinitely. Fiscal arithmetic eventually imposes constraints, especially in a world of slower global growth and tighter financial conditions. When that impulse plateaus, growth must be carried by private investment and household demand. If those engines are not ready, momentum will fade.

History offers repeated reminders that state-led growth phases, if not transitioned in time, lose traction. Infrastructure creates capacity, but capacity becomes productive only when private risk-taking follows. Roads, ports, and digital rails are enablers, not substitutes, for entrepreneurial confidence.

Nominal GDP dynamics reinforce this vulnerability. Lower inflation compresses pricing power and revenue growth, making firms more conservative in capital allocation. Even when balance sheets are repaired, investment appetite depends on future demand expectations. Without a visible expansion in middle-income consumption and labour incomes, those expectations remain muted.

Employment trends sharpen the concern. Much of India’s recent growth has emerged from sectors that are either capital-intensive or skill-intensive, limiting their ability to absorb labour at scale. Growth without commensurate job creation risks social and political friction, and weakens the feedback loop between productivity and consumption.

Centre–State Growth Asymmetry
India’s federal structure adds another layer to the growth question. While central government capex has surged, state-level capacity to complement and amplify that investment varies widely. Some states have leveraged infrastructure, regulatory reforms, and skilling initiatives to attract private capital. Others remain constrained by fiscal stress, administrative bottlenecks, or limited industrial depth.

This divergence matters because sustainable growth ultimately depends on decentralised execution. Investment decisions, labour absorption, and productivity gains occur locally. When growth is disproportionately centralised, it risks creating islands of efficiency rather than a broad national investment cycle.

Moreover, states play a decisive role in human capital formation, urbanisation, and labour market flexibility. Without deeper coordination between central infrastructure push and state-level reform capacity, the translation from public investment to private enterprise remains incomplete.

In a federal economy, growth is not delivered by proclamation from the Centre but earned through state-level competitiveness, administrative discipline, and investment readiness. As central capex rises, the burden on states is no longer to wait for transfers but to convert infrastructure into enterprise, jobs, and revenue through harder, faster execution.

Private Confidence
Growth does not compound smoothly through steady accumulation alone; it advances in uneven surges when private enterprise is willing to take risk, innovate, and expand capacity ahead of certainty. This insight traces back to early-20th century economist Joseph Schumpeter’s distinction between routine expansion and genuine economic development, where innovation, not expenditure, altered the structure of production. Public investment can prepare the ground, but without entrepreneurial conviction, it cannot by itself generate lasting dynamism.

None of this negates India’s long-term potential. Demographics remain favourable. Digital adoption continues to lower transaction costs. Manufacturing ecosystems are slowly deepening, but need focus.

The policy challenge now is to use this cyclical strength to engineer a structural handover. That requires shifting focus from the volume of public spending to the quality of private response. Credit flows must increasingly reward risk-taking outside government-anchored sectors. Labour markets must become more flexible without eroding security. Income growth must broaden beyond the top deciles to revive mass consumption.

India is not structurally stalled, but it is not structurally secure either. Policymakers must resist the temptation to read headline growth as a verdict on reform adequacy. Strong numbers can coexist with fragile foundations. Budget 2026 will test whether India’s growth strategy is adaptive or repetitive. Growth, after all, is proven by resilience when the stimulus fades.