Quo Vadis, Growth Momentum?

However, the long distance between the first two, the US at $31 trillion and China $19 trillion, and India, should preclude any complacency or triumphalism. Instead, policymakers would do well to focus laser-like on maintaining and indeed further accelerating the growth rate. The enormous gap that has opened up over the last three decades between our Northern neighbor and us must be closed as soon as possible. It is worth repeating that our most effective foreign policy is to accelerate the rate of growth of our domestic economy. 

The relatively high GDP growth rate, low inflation, which remains well below the RBI’s target rate of 4%, comfortable levels of foreign exchange reserves that allow 11 months of import cover (compared to two weeks of import cover in 1991 when I joined the Ministry of Finance as economic advisor!), an eminently managable current account deficit at 1.2% of GDP and a stable fiscal situation thanks largely to Rs 2.1 trillion dividend handout by the RBI, which has compensated the decline in GST collections. All these features point towards a ‘goldilock moment’ for the Indian economy. The challenge is to extend this moment and sustain the 8%+ growth rate for the decade and beyond to be well on our way towards Viksit Bharat. 

For A Robust Response

The biggest challenge will, of course, be to trigger a more robust response from domestic private investors, as this has remained weak and below expectations. At 30% of GDP, gross fixed capital formation is well below its historical peak of 36% in 2007 and also inadequate to meet the capacity expansion needs of the economy. Foreign capital inflows, especially portfolio inflows, that boost the secondary capital markets, have also been weak. Despite the move to permit higher levels of foreign investment in additional sectors like insurance, net FDI inflows remained modest at about $7 billion in the first half of FY 26. The Indian economy is thus faced with a private investment constraint, which can only be partially compensated by higher public sector capex. Given the rather limited public fiscal space, policy needs to be directed towards incentivising and encouraging private capital formation and investment in capacity expansion.  

The sharp rise (3X) in the number of retail equity investors from about 40 million in 2020 to 123 million in 2024 augurs well for the future. There have been a record number of IPOs in 2025, both for large companies and SMEs. This rising engagement of retail investors in the primary and secondary capital markets, overall a positive trend for greater mobilisation of household savings, has spelled trouble for commercial banks. Deposit growth has weakened quite markedly, and the credit-to-deposit ratio has now crossed 80%. This will weaken the banking sector’s ability to extend credit even to worthy borrowers, further dampening growth in commercial bank credit, which is already rather anemic at about 11%. 

Financial Sector Reforms

Financial sector reforms, therefore, are now urgently required and should form a prominent part of the forthcoming budget. It is time to reverse the clock and privatise public sector banks, except the SBI, which can continue to remain the banker to the government. By increasing the number of private sector banks, the Government will encourage greater competition and induce more efficiency in commercial banking operations that will bring down their intermediation costs. These are relatively high compared to global norms. 

The RBI should adhere to the Basel Committee norms and not encourage banks to continue with extraordinarily high capital adequacy ratios as they exist at present. RBI’s supervisory functions will have to be further sharpened and streamlined to make commercial banking more responsive to the needs of the non-financial sector borrowers, especially in the SME sector. It is time to initiate a major overhaul of the country’s financial sector, encourage competition, reduce time and regulatory arbitrage, and consolidate savings flows, such as to generate a higher deposit growth and grow the size of commercial banks to bring them to a globally comparable scale. 

Four Labour Codes

Having finally notified the four labour codes, after a hiatus of five years, the sooner their rules are framed with a fair degree of cohesion and convergence across States, the better. It is time to unify the national labour market and minimise state-specific variations in working conditions, social security provisions, and take steps to blur the distinction between the formal and informal segments of the labour market. 

One major step would be to make it optional (and not mandatory as it is at present) for establishments employing more than 20 workers, for workers to subscribe to the ESI or the EPFO. This will eliminate a major impediment in unifying the informal and formal labour markets and gradually work to erode the enormous premium that ‘pakki naukri’ commands today. With optional social security available to all those who want it and with rising workers’ literacy and awareness, it will not take too long for a social security safety net to come into place for the entire workforce. Moreover, existing social security providers like the ESI and EPFO will have to exert effort to increase their membership. This will surely be a positive move and will help improve both efficiency and accountability in these organisations. 

One additional advantage, which can have a significant impact, of removing the mandatory enrolment in government social security schemes would be a sharp decline in visits by the labour inspectors. These visits greatly discourage firms from onboarding apprentices, as the onus of proving that these apprentices are not a part of the regular workforce is on the employers. Firms simply do not take on apprentices so as to try and avoid rent-seeking and compliance burden. In these technologically turbulent times, apprenticeship may be the most effective way to align the supply of skills with industry’s requirements. This will be a far superior modality for relevant skill formation that will respond to the needs of a rapidly changing technology. 

Quality Control Orders 

It is surely a no-brainer to shelve the Quality Control Orders (QCOs) indefinitely at this stage of our manufacturing prowess. Several ministries like MEITY have already done that. It is time also that the Ministry of Commerce and Industry follows suit and does away with the Democles sword of QCOs on a large  range of products from 1st February 2026. QCOs can be effective non-tariff barriers and discourage imports and encourage domestic production. This intention is, of course, well taken. However, we cannot and should not try and attempt indegenisation prematurely. That can be hugely disruptive and significantly increase the compliance burden rather than reducing it. Learning from our past experience of Maruti and more recently of Apple, we know that establishing domestic supply chains takes time. Therefore, as in the past, a calibrated schedule for increasing domestic value addition should be put in place for the range of imported machinery and consumer durables. We should wean our industry away from import dependence, but this is better done in close consultation with industry rather than as a fiat. 

Cross-Subsidisation Of Domestic Consumption

Finally, it is also time for whittling down the cross-subsidisation of domestic consumption by imposing unjustifiably high tariffs on industrial usage of energy and transport. Quite a start has been made recently when railway passenger fares were raised. The fact that there has been no pushback from consumer forums is a good sign. Energy tariffs, distorted by rampant populism, also need to be rationalised. Indian industry cannot be expected to be globally competitive while bearing extraordinarily high energy and transport costs. 

Above are a few suggestions that need urgent implementation for maintaining the reform momentum that the Prime Minister wants to carry over from the previous year into 2026. Let's hope that the forthcoming budget will include these and other reforms and establish the framework for further accelerating India’s economic growth rate. Our young and aspiring population deserves that. 

(The writer is an eminent economist and Chairman, Pahle India Foundation. He has served as Vice-Chairman, NITI Aayog. Views are personal.)