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India's path to achieve sustainable growth: S&P's Hanna Luchnikava-Schorsch

Though manufacturing faces challenges, India can capitalise on evolving trade dynamics for accelerated growth and greater global supply-chain integration

By Hanna Luchnikava-Schorsch

Published: Jun 19, 2025 04:21:47 PM IST

Updated: Jun 19, 2025 04:30:19 PM IST

S&P Global Market Intelligence projects the size of Indian nominal GDP to nearly double within the next five years, to cross the $7 trillion mark by FY31. Illustation: Chaitanya Dinesh Surpur

Having reported a solid real GDP growth of 7.4 percent in annual terms during the March 2025 quarter, India remains the world’s fastest-growing large economy. According to the International Monetary Fund (IMF)’s latest economic outlook, India is poised to overtake Japan to become the world’s fourth largest economy this year, while S&P Global Market Intelligence projects the size of Indian nominal GDP to nearly double within the next five years, to cross the $7 trillion mark by FY31.

Yet sustainably strong growth is not guaranteed, particularly at a time of rising geopolitical competition and global challenges to growth. In fact, the economy’s growth momentum has slowed since last year, while an alternative measure of growth looking at the supply side of the economy—real gross value added—is showing a more modest annual expansion of 6.8 percent in the March quarter.

Unlike many of its Asian peers, India does not depend strongly on external trade for growth, which cushions it somewhat from ongoing shifts in global trade and tariff policies, though it is not immune to the rising trade protectionism. While the government’s targeted policy interventions are helping to build domestic manufacturing capacity and strengthen India’s role in global supply chains, India’s manufacturing sector remains relatively small, leaving the economy dependent on less labour-intensive services and lower-productivity agriculture for growth and job creation.

Supporting all pillars of domestic demand

Another prominent feature of India’s recent growth is its high dependence on public investment. Over the past decade, the government has focussed on building the country’s physical and digital infrastructure and capital stock accumulation. Central government capital spending on infrastructure has grown 38.8 percent between FY20 and FY24, according to the 2025 Economic Survey, becoming the key driver of growth. The environment for private investment has also improved, not least because of financial sector reforms, streamlined tax regulations and other regulatory incentives, as well as spillovers from public infrastructure drive. Yet private sector investment continues to lag, held back by the uneven recovery in domestic demand and global policy uncertainty.

A primary growth driver in the past, private consumption has been slow to recover from the pandemic, with a growing disconnect between rural and urban spending. While rural spending has improved, supported by rising farm incomes and moderating inflation following last year’s good monsoon, urban consumption remains sluggish. Partly, this is due to high interest rates and the Reserve Bank of India’s (RBI) crackdown on unsecured lending, but there are also more structural issues including an unstable labour market and gaps in long-term social security.

The government has been gradually reducing the tax burden for the middle class and continuing to subsidise government-administered social security schemes. But it is the high-quality formal sector job creation and greater access and affordability of social security (including through private insurance and pension) that would support the sustained recovery in private consumption. The government’s focus on manufacturing sector development for job creation may aid this goal, but it would take time to see meaningful progress.

Also read: GDP: A good growth number brings relief

Rewiring of global trade: A silver lining

India is not immune to the ongoing shift in global trade and tariff policies towards protectionism despite a moderate dependence on external trade for growth. The country faces higher tariffs on exports to the US, its largest export partner. The broader spillovers of heightened global trade and financial uncertainty may be more damaging to its growth in the near term. Private corporate investment may be particularly vulnerable to prolonged policy uncertainty.

But beyond the initial impact, increasing trade protectionism will further encourage supply-chain diversification, likely benefiting India. The threat of higher US tariffs on other Asian exporters could be leveraged to India’s advantage to accelerate its manufacturing growth and increase its share in global exports. Manufacturing value added accounts for a relatively modest 17.2 percent of India’s real GDP (latest government estimate for FY25), against the government target of 25 percent.

India’s share in global manufacturing exports has remained largely flat over the past decade, reaching only 1.8 percent in 2024. In contrast, its share in global service exports increased from 2.9 percent in 2014 to 4.3 percent in 2024.

Further, the country’s share in global foreign direct investment (FDI) inflows has declined after a post-pandemic spike, from a high of 6.5 percent for FY21 down to 2.1 percent in FY24.

That said, the government has implemented targeted policy interventions to build domestic manufacturing capacity and strengthen India’s role in global supply chains. In particular, the Production Linked Incentive schemes introduced since March 2020 have contributed to growth and boosted exports in several manufacturing segments, including electronics, pharmaceuticals and automobiles. Notably, mobile phone exports, valued at zero in 2016, soared to $20.4 billion in 2024, growing 44 percent from 2023 alone.

The private sector also remains optimistic about growth opportunities in India’s manufacturing sector. High-frequency HSBC PMI® data —compiled by S&P Global Market Intelligence—highlights the domestic manufacturing sector’s resilience to recent global headwinds compared with other major economies. The country’s headline manufacturing PMI® readings over the past 12 months substantially exceeded global averages, supported by strong orders, increased hiring and inventory buildup.

An analysis of S&P Global Market Intelligence’s Strategic Opportunity Index® (SOI) measuring a market’s potential to generate opportunity for enterprise and looking at broad drivers of competitiveness over time also indicates India has made notable progress in enhancing several key aspects of competitiveness, including policy favourability, market potential, and logistics efficiency. Yet, the latter remains the key area of opportunity going forward, along with availability of capital and skilled labour.

Looking forward: Fostering a competitive environment

Although the Indian manufacturing sector faces notable challenges, the resilience demonstrated by a host of indicators, such as HSBC PMI® data and SOI scores, suggests a positive momentum. As economies adapt to evolving trade dynamics and tariff challenges, India can capitalise on this momentum for accelerated manufacturing growth and greater global supply-chain integration. A strategic shift towards local sourcing, proximity to end-markets, and enhanced regional integration should attract additional investment to the sector, accelerating India’s technological advancement and manufacturing competitiveness and creating additional high-quality manufacturing jobs.

An S&P Global Market Intelligence analysis shows that, beyond the initial negative impact or rising trade policy uncertainty, the effects of further manufacturing reshoring and trade regionalisation strategies on India could be positive over time. Companies are expected to relocate their operations to regions that offer competitive advantages, with India emerging as a key destination. Further, improvements in logistics efficiency, labour market deregulation, and financial resource availability would create a favourable environment for manufacturing investment. This, in turn, would lead to increased economic efficiency, greater manufacturing output, higher employment and stronger economic growth overall.

● The writer is head of Asia-Pacific Economics, S&P Global Market Intelligence

(This story appears in the 27 June, 2025 issue of Forbes India. To visit our Archives, click here.)