India to remain fastest-growing major economy despite global slowdown

India’s economic growth is projected to moderate slightly in FY26 but continue to outpace the rest of the world, according to the World Bank’s latest estimates. The Bank has revised India’s forecast down to 6.3% from 6.7% projected in January. Yet, India is still expected to maintain its position as the fastest-growing major economy globally.

India first overtook China as the world’s fastest-growing major economy in 2015, aided by a favourable external backdrop, domestic macroeconomic stabilisation, and a reform-oriented policy agenda. From 2015 to 2018, GDP growth ranged between 7.5% and 8%, while China’s slowed to 6.5–6.7% due to a pivot from investment-led to consumption-led growth. This period was marked by initiatives such as ‘Make in India’, liberalised FDI policies, fiscal consolidation efforts, and the implementation of the Goods and Services Tax in 2017.

However, economic momentum weakened by late 2018 due to banking sector stress, declining consumption, and tepid investment. Growth slowed to 5% in FY20, down from 6.1% in FY19, amid global headwinds and domestic financial sector challenges. The COVID-19 pandemic led to a historic GDP contraction of 7.3% in FY21. A strong rebound followed in FY22 with 8.7% growth, supported by domestic demand, public infrastructure spending, and an export recovery.

Since 2022, India has sustained growth in the 6–7% range even as advanced economies and China decelerated. Institutions like the IMF, World Bank, and the United Nations have consistently projected India as the fastest-growing major economy since 2021, a trend expected to hold through FY26.

In contrast, the global economy is expected to grow by only 2.3% in 2025, with advanced economies experiencing headwinds. Protectionist policies, particularly trade decoupling between the US and China, are slowing global trade growth to below 2%, well under the historical average of 4–5%. Central banks in developed countries, including the ECB and the US Fed, hold interest rates high due to persistent inflation, dampening consumption and investment. Ongoing geopolitical conflicts, energy market instability, and sluggish productivity further weigh on sentiment.

The US economy is forecast to grow at 1.4% in 2025, down from 2.3% earlier, with monetary tightening, inflation fatigue, and election-year uncertainty affecting public investment. China’s 2025 projection holds steady at 4.5%, though it remains subdued relative to its historical performance. Structural challenges such as a troubled real estate sector, declining workforce participation, and capital flight pose long-term risks. The euro area is expected to grow by just 1%, with Germany emerging as one of the weakest performers due to high energy costs, an overreliance on exports to a slowing China, and delays in green transition investments.

India’s continued outperformance is rooted in both cyclical and structural factors. Its consumption-driven economy—powered by an expanding middle class, increasing urbanisation, and rising per capita income—makes it more resilient to external shocks. With a median age of 29, India is in a demographic sweet spot, unlike ageing economies in Europe and East Asia.

Government-led capital expenditure in infrastructure is crowding out private investment, particularly in manufacturing and logistics. Structural reforms, including the Insolvency and Bankruptcy Code, GST, and the expansion of digital public infrastructure, have improved formalisation, compliance, and productivity. The country’s IT and digital services exports have evolved from basic call centres to high-margin Global Capability Centres in fintech, edtech, and healthtech, bolstering the external sector.

India has also become a key destination for foreign direct investment under the China+1 strategy, especially in sectors like electronics, pharmaceuticals, semiconductors, and renewable energy. However, challenges persist. Dependence on imported oil leaves India vulnerable to energy price shocks. A weak export sector could limit gains during global upswings. Additionally, fiscal pressures may rise due to subsidy burdens during election cycles.

While the world adjusts to a low-growth equilibrium shaped by geopolitical fragmentation and demographic drag, India’s growth is driven by favourable domestic dynamics and policy continuity. Its challenge is to translate this momentum into inclusive development by strengthening human capital, expanding economic participation, and building resilience to external shocks.

Source: Economic Times