Survey hails rise in potential growth rate, India's status as world's fastest-growing economy

Chief Economic Advisor V Anantha Nageswaran addresses the media during the Economic Survey 2025-26 press conference, in New Delhi

• India's GDP growth is 7.4%, projected to moderate to 6.8-7.2% in coming years
• Potential growth rate rises to 7% due to reforms, capex, and productivity gains
• Survey highlights rupee underperformance and gig worker pay issues.

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The Economic Survey's headlines are unabashedly positive, reiterating India's status as the world's fastest-growing major economy. GDP growth for the current fiscal year is 7.4%, though it is projected to moderate to between 6.8% and 7.2% over the next two fiscal years; the lower end of this range aligns with the IMF's estimates.

Significantly, the Survey reckons that potential growth has risen to 7% from current levels of 6.5%. Given current economic trajectories, this should translate into per capita income growth of over 5%. Furthermore, inflation is described as "tamed and anchored," which may pave the way for interest rate cuts.

It hails the resilience of the Indian economy post the imposition of the ‘penal’ tariff of 25 percent by President Trump, raising the total 50%. It hails the slew of structural reforms, including the cut in GST and the implementation of the new labour codes. ”A sense of dynamism has taken hold in the government,” the survey says, seemingly crediting the economic reforms to the pressure created by the tariffs.

Rise in Potential Growth Rate

The survey posits that potential economic growth has risen from 6.5 percent to 7 percent boosted by sustained economic reforms intended to boost ease of doing business. Major steps include FDI reforms, the introduction of production-linked schemes (PLI), improving logistics, and simplifying tax laws. This has been supplemented by sustained investment in both physical and digital infrastructure. Effective capex in physical and digital, according to the survey, has reached 4 percent of GDP.

All this will lead to a rise in total factor productivity, a rise which translates into higher growth. TFP is something of a holy grail among economists. A rise in TFP implies greater efficiency due to smarter combinations of inputs of capital and labour. The survey estimates TFP growing at 1.9 percent between FY 26 and FY30, up from 1.7 percent in the immediate post-pandemic years.

That's only a return to the 1.9 percent growth between FY12-13 and FY 19-20, though. Similarly, the survey calculates a growth in capital stock of 7.6 percent in the next five fiscal years, higher than the 1.7 percent in the post-covid years. Between FY13 and FY20, growth was 7.6%.

Ongoing reforms, notably the free trade agreements (FTA) signed with the EU, UK and others, should further boost productivity. So should the investments in both physical and digital productivity.

The learning-by-doing, which will accompany the growth of new sectors such as semiconductors, electronics (a major success of the PLI policy) and defence equipment, should also help.

Cost of Capital

The survey argues that the cost of capital is high in India for structural reasons, namely the fact that the country has a persistent current account deficit. As a result, it needs to attract foreign capital for which it needs to pay a risk premium. Energy costs, too, need to come down.

Nonetheless, Gross Fixed Capital Formation (GDCF) now stands at 30.5 percent of GDP above the pre-pandemic average of 28.6 percent. GFCF as a percentage of GDP had been declining from FY13 to FY20 and further during the pandemic years, a trend that has now reversed.

Both consumption and investment are anchoring growth, the survey reiterates. The former stands at 61.5 percent of GDP in the first half of the current fiscal year, the highest since FY12.

Not all Rosy

However, the Survey is far from Panglossian and posits that India is operating below its full strategic potential. Notably, the rupee is described as punching below its weight, causing foreign investors to pause.

The rupee's performance does not reflect India's "stellar economic fundamentals", according to the survey. It also flags the risk of what it refers to as "disorderly multipolar breakdown".

“The paradox of 2025 is that India’s strongest macroeconomic performance in decades has collided with a global system that no longer rewards macroeconomic success with currency stability, capital inflows, or strategic insulation,” the survey complains.

The Survey also reiterates social concerns mentioned in previous editions, such as digital device addiction and obesity. It also flags the relatively low pay of gig workers, a topic of much recent debate.

“The paradox of 2025 is that India’s strongest macroeconomic performance in decades has collided with a global system that no longer rewards macroeconomic success with currency

stability, capital inflows, or strategic insulation,” the survey complains. Reducing imports sustainably by emulating the success of the electronics industry, which the survey hails, in other areas could resolve the conundrum.