In the latest chapter of India’s economic ascent, the International Monetary Fund (IMF) has reaffirmed the nation’s leadership on the global stage. In its World Economic Outlook, the IMF projects India’s growth at a robust 6.6% for FY 2025-26 positioning it as the fastest-growing major economy worldwide. This upward revision, driven by resilient domestic demand and a strong first quarter, offers a powerful counter-narrative to a slowing global economy.
As India sets its sights on becoming the world’s third-largest economy by the end of this decade, the journey towards the $7 trillion milestone presents both, opportunities and challenges. Sustaining fiscal prudence, navigating global headwinds and deepening structural reforms will be crucial to ensure that the growth remains inclusive and durable.
The IMF’s optimism rests on India’s strong domestic fundamentals. Amid global uncertainty and rising protectionism, India’s internal consumption has emerged as a resilient engine of growth. Robust household spending, supported by rising incomes and a youthful demographic, has cushioned the economy against external shocks.
India’s impressive 7.8% GDP growth in the first quarter of FY 2025-26 reflected broad-based expansion across manufacturing, services and investment. Services, particularly, grew by 9.3%, driven by digital adoption and urban demand. The government’s focus on capital expenditure in infrastructure has catalysed private investment, laying the groundwork for long-term expansion.
However, the IMF also warns of emerging risks. Uncertain trade policies and weakening global demand could constrain India’s export momentum. The Fund’s October 2025 review noted that tariff shifts and slowdowns among major partners might cool external demand and complicate India’s growth calculus.
Economic strengths are shaping India’s future. Demographic Dividend and Domestic Demand: India’s youthful demographic remains a core advantage. With one of the world’s largest working-age populations, the nation enjoys a unique growth window. This potential, however, must translate into productivity through sustained investments in education, skilling and job creation. Strong household consumption provides a cushion against global turbulence and gives policymakers space to pursue reforms without excessive reliance on exports.
Technological Leapfrogging and Digital Transformation: India’s digital revolution is redefining its growth model. Affordable data, expanding broadband and smartphone penetration have transformed service delivery and financial inclusion. Over 1.7 lakh gram panchayats are now connected by optic fibre, integrating even remote areas into the digital economy.
Reforms such as Direct Benefit Transfers and digital public infrastructure have sharply reduced leakages in welfare programmes. For instance, the use of point-of-sale devices in the public distribution system has cut leakages from 46% to 28%. Such initiatives have enhanced transparency, reduced extreme poverty and improved delivery efficiency.
Infrastructure Push and Manufacturing Ambitions: Public investment in infrastructure – spanning roads, railways, ports, power, and logistics –remains central to India’s growth strategy. Efficient execution can ease long-standing bottlenecks and enhance manufacturing competitiveness. India’s aspiration to evolve into a global manufacturing hub depends on faster labour reforms, skilling and an enabling business environment. A robust public-private investment framework can further unlock opportunities in high-value manufacturing and export diversification.
Despite strong macroeconomic fundamentals, deep-seated structural challenges persist. Addressing them will determine whether India can sustain momentum through the next decade. Labour Market Dualism: A glaring productivity gap persists between the formal and informal sectors. Formal workers generate about Rs 12 lakh in gross value added annually, compared to Rs 1.5 lakh in the informal sector –where nearly 90% of India’s workforce remains employed. A nationwide formalisation drive, supported by simplified compliance, labour-market reforms and incentives is essential to improve productivity and job quality. Expanding large-scale manufacturing and service enterprises can further widen the tax base and create sustainable employment.
Skill Gaps and Underutilisation of Human Capital: Only about 13% of India’s workforce has received formal skill training, according to the Periodic Labour Force Survey (PLFS). As a result, many graduates remain employed in low-skill roles. Mercer-Mettl’s Graduate Skill Index 2025 finds that only 42.6% of graduates are employable. Greater investment in vocational training, apprenticeships and lifelong learning is crucial to harness India’s demographic dividend fully.
The Digital Divide: While India’s digital transformation is commendable, digital inequality endures. Only 57% of schools have functional computers, and barely half have internet access. National Statistics Office (NSO) data show that nearly half of rural women still lack a mobile phone. Bridging this divide through universal digital access and literacy initiatives will be the key to ensuring inclusive participation in the digital economy.
Global Headwinds and Climate Risks: Global trade tensions, tariff changes and supply-chain realignments could affect India’s export competitiveness. Simultaneously, climate change poses long-term risks – from extreme weather events disrupting agriculture and infrastructure to the fiscal costs of energy transition. India must balance domestic demand-driven growth with green transition investments, promoting renewable energy and climate-resilient infrastructure.
If India can leverage its demographic advantage and favourable macroeconomic environment to implement deep structural reforms, steady growth of 6-7% could be transformative. But without job creation and productivity gains, high GDP growth alone will not deliver shared prosperity.
(Gulam Goush Ansari is Assistant Professor, Department of Economics, Government College of Arts, Science and Commerce, Khandola-Marcela.)
