Context:

• India's GDP growth for the last quarter is expected to be as high as 8%, defying fears that the Middle East conflict and its accompanying oil-price shock would derail the economy.
• The subsidised FCNR flows and other measures used to manage the external front are also expected to show an impressive final tally.
• While the economy has shown short-term resilience, this resilience is largely cyclical, not structural — and sustaining growth now requires deeper reform.

How India Absorbed the Shock — Three Factors:

• Coordinated fiscal-monetary-regulatory stimulus (2025): Direct taxes were cut in February, GST was rationalised in September, and policy rates were reduced by 150 basis points, accompanied by regulatory easing in the financial sector.
• Export diversification and currency depreciation: Non-oil exports accelerated, helped by a nearly 15% real effective exchange rate depreciation since 2025, reduced US tariffs, and resilient global demand.
• Swift and nimble energy diversification:
  • India diversified crude imports (from Russia, LNG from the US and Oman) to avoid domestic shortages.
  • Paradoxically, India imported 17% more energy than normal last quarter, and the government absorbed the bulk of the oil shock to protect the private sector — though this will add to fiscal pressure ahead.

The Caution - Cyclical Strength, Not Structural Depth:

• Much of the recent pick-up is cyclical, driven by tax and interest-rate cuts and credit growth, and these impulses will eventually wane.
• The real test of long-term growth is the investment rate, which remains stuck at its decadal average of 32% of GDP and has not risen in recent years, despite rising public investment and real-estate capex.
• Corporate capex continues to languish at 10–11% of GDP, and balance sheets of the top 1,000 listed firms show no discernible pick-up in 2025–26.
• Central government capex — which underpinned the post-Covid recovery, growing 30% between 2020 and 2023 — has slowed sharply: 11% growth in 2024 and just 1.6% in 2025, as fiscal space was consumed by tax cuts.
• Cash transfers are also placing pressure on state capex, which is now growing below nominal GDP.

Why Corporate Capex Remains Sluggish?

• The weak demand visibility is the key constraint. Factories have been running at only 75–76% capacity for ten years, and China's excess production flooding global markets — including India — gives companies good reason to hold back on new investment.
• Only strong, sustained consumption and export demand can break this cycle, as seen between 2003 and 2012, when 16% export growth crowded in private capex.
• In contrast, post-pandemic private consumption and export growth have been a modest ~5%, aside from last year's stimulus-driven bump.

The Consumption and Export Challenge:

• Consumption is currently being fuelled by credit rather than income growth.
• For example, NBFC lending to households is growing at 20%, and unsecured personal bank lending momentum has risen to 25%, reflecting a sharp rise in household leverage. For this not to backfire, accelerating household incomes is essential.
• On exports, white-collar jobs created through Global Capability Centres (GCCs) and service exports have driven urban consumption, but "the AI writing is on the wall".
• Service export growth (in nominal dollar terms) has halved to 8% over the last year from 16% in the previous four years, and export growth among major IT firms has been flat.
• PLFS data show employment rates rising, but a significant share of new jobs remain "self-employed" rather than "salaried," even though the mix improved somewhat in 2025.
• The share of the workforce in agriculture, while declining, remains higher than pre-pandemic levels. 

The Fundamental Challenge - Labour vs Capital:

• The core structural question is: how can labour be made a more attractive factor of production relative to capital, in an era of automation and AI? India's capital-labour ratio has been rising for over two decades.
• Reversing this requires policy focus on education, skilling, health, and rationalising labour laws — old constraints that remain unresolved even as challenges evolve.
• Raising the cost of labour indirectly (relative to capital) could help redirect scarce fiscal resources toward labour-intensive sectors.

Exports and Trade Policy:

• India's goods exports have declined from 17% of GDP a decade ago to 11%, yet policymakers are credited for not succumbing to export pessimism —
  • Signing a series of Free Trade Agreements (FTAs),
  • Moving to rationalise tariffs and QCOs (Quality Control Orders), and
  • Allowing exchange-rate depreciation.
• But for exports to become structurally competitive, factors of production must become more enabling: tariffs and non-tariff barriers need decisive rationalisation, and overregulation must be eased more holistically.

Conclusion:

• Boosting consumption and investment structurally is key to a sustained private capex cycle, which in turn is key to crowding in FDI and stabilising the balance of payments.
• A cyclical pick-up and strong capital inflows are welcome, but should be seen as a bridge — a means, not an end — to address deeper structural issues.