India’s economy hits a roadblock

Workers tending to machinery at a sugar factory in Karad, India. Industrial growth, the stock market and the rupee are sinking, and consumers earn too little to buoy them, stymieing India’s drive to become a developed economy. — ©2025 The New York Times Company

A YEAR ago, India seemed poised for an economic resurgence.

Having overtaken China as the world’s most populous nation, its leaders celebrated the title of the fastest-growing major economy.

The optimism extended to investors, who saw the potential for India’s 1.4 billion people to become a global economic powerhouse amid international trade tensions and geopolitical conflicts.

In 2022, India surpassed Britain as the world’s fifth-largest economy and was expected to edge past Germany next year.

However, cracks are starting to show in this optimistic narrative.

The stock market, which had enjoyed steady gains, recently wiped out six months of progress. Meanwhile, the rupee continues its steep decline against the US dollar, shrinking the global value of Indian earnings.

India’s burgeoning middle class, once buoyed by rapid economic growth, is now wondering where things went awry.

Prime Minister Narendra Modi faces pressure to recalibrate his promises as the nation grapples with slower-than- anticipated growth.

In November, India’s annual growth rate was revealed to have dropped to 5.4% over the summer months. This marked a sharp decline from the previous fiscal year’s impressive 8.2% growth.

While the revised outlook for this fiscal year stands at 6.4%, experts warn that India has merely returned to a more typical trajectory.

“It’s a reversion to trend,” said Rathin Roy, a professor at the Kautilya School of Public Policy in Hyderabad.

He argued that past growth spurts were fuelled by unsustainable bank loans. Additionally, the government’s 2016 demonetisation effort, intended to curb underground commerce, dealt a lasting blow to the economy.

“India’s economy only got back to its pre-pandemic size last year, much later than many other countries,” Roy added.

This economic slowdown is prompting overseas investors to pull out.

“Foreign investment has taken the call that the Indian stock market is overvalued,” Roy explained.

Investors who had watched their portfolios triple in value between 2020 and 2024 are now looking to the more stable Wall Street.

Domestic investors have also played a crucial role in driving up stock prices.

During Modi’s tenure, the number of Indians holding investment accounts skyrocketed from 22 million to 150 million, according to brokerage firm Motilal Oswal.

The rising investor class was expected to help Modi’s party secure another victory in June’s parliamentary elections. However, despite the government retaining control, Modi’s party lost its parliamentary majority.

The luxury market had boomed, with sales of cars and high-end electronics surpassing those of motorcycles and household essentials.

Yet, this prosperity remained confined to the wealthiest 10% of the population, leaving the rest struggling.

Expanded welfare schemes, including free wheat and rice for 800 million people, helped cushion some of the economic pain. But jobs remain scarce, and wages have stagnated.

“Jobs are not being created, so people don’t have incomes, and wages are depressed,” said Arvind Subramanian, an economist at the Peterson Institute for International Economics and former chief economic adviser to Modi.

The government has prioritised large infrastructure projects like bridges and highways, hoping to attract private investment. But many businesses are hesitant, citing red tape and political interference.

The aviation industry provides a striking example of this mismatch.

New airports have been built, but airlines are pulling out. Terminals meant to serve vacation destinations, such as Sindhudurg between Mumbai and Goa, are struggling to stay open as ticket sales plummet.

Subramanian attributes the lack of demand to weak employment figures.

“Regular people,” he said, referring to the vast majority of Indians who neither benefit from stock market gains nor qualify for government aid, “don’t earn enough to buy the basics.” Approximately 100 million of these individuals rely on free grain distribution.

The falling rupee has added to the economic strain. The central bank had previously spent billions propping up the currency, a move Subramanian criticised as “extremely damaging”.

The government’s current chief economic adviser, V. Ananta Nageswaran, has urged businesses to raise wages.

“Not paying workers enough will end up being self-destructive or harmful for the corporate sector itself,” he warned. — ©2025 The New York Times Company