Sajjid Chinoy writes: Economy has weathered West Asia shock. Now, reform for sustained growth

First, policymakers executed a joint fiscal-monetary-regulatory stimulus in 2025. Direct taxes were cut in February, GST was rationalised in September, policy rates were cut effectively by 150 basis points accompanied by some regulatory easing in the financial sector.

Second, non-oil exports have begun to accelerate, likely underpinned by the near 15 per cent depreciation of the real effective exchange rate since 2025, a reduction in US tariffs and resilient global growth.

Third, the policy response to the Middle East conflict was swift and nimble. India scurried to diversify energy imports — crude from Russia, LNG from the US and Oman — to prevent domestic shortages. Paradoxically, India imported 17 per cent more energy than normal last quarter. Further, the fisc absorbed the bulk of the oil price shock to insulate the private sector, though this will increase fiscal pressures.

The good news: Growth has been relatively unaffected by the conflict. The cautionary warning: There is no room for complacency because much of the recent pick-up is cyclical, induced by tax and interest-rate cuts and fuelled by strong credit. At some point these impulses will wane, and growth rates will be shaped by the structural underpinnings of the economy.

Perhaps the most important barometer of long-term growth is the investment rate. Here the news is more sobering. Fixed investment remains at its decadal average of 32 per cent of GDP and has not lifted in recent years. This is despite rising public investment and real estate capex, because corporate capex continues to languish around 10-11 per cent of GDP. Balance sheets of the top 1,000 listed companies reveal there was no discernible pick-up in corporate capex in 2025-26. The imperative for corporate capex to lift is only increasing because both real estate and public investment have begun to slow. Central capex underpinned the post-Covid recovery, growing 30 per cent between 2020 and 2023, but then slowed to 11 per cent in 2024 and just 1.6 per cent in 2025, as last year’s tax cuts cannibalised fiscal space. With the fisc absorbing the bulk of the oil shock, central capex will be under pressure again this year. Meanwhile, cash transfers on demand pose a clear and present danger to state capex, which is now growing below nominal GDP.

What then will it take for corporate capex to broaden and deepen? Quite simply, more demand visibility. With capacity utilisation stuck in the 75-76 per cent range over the last decade, and ever-increasing Chinese overcapacity flooding the world, including India, it’s understandable why corporates remain cautious. Only strong, sustained consumption and export demand will shake them out of their stupor. It was 16 per cent export growth between 2003 and 2012 that crowded in private capex. In contrast, post-pandemic private consumption and exports grew at just about 5 per cent, before last year’s stimulus.

What’s needed is for consumption and export growth rates to rise more structurally. The former is inextricably linked to the employment challenge. White-collar jobs created through GCCs and service exports have been key to urban consumption. But the AI writing is on the wall. Service export growth (in nominal dollars) has halved to 8 per cent over the last year from 16 per cent the previous four years. Total employment across the major IT firms has been flat. To be sure, PLFS data show India’s employment rate is rising, but a significant fraction of the new jobs are “self-employed” vis-à-vis “salaried-jobs” even though, encouragingly, the mix has improved in 2025. Sectorally, the share of the population working in agriculture, though reducing, is still higher than pre-pandemic levels.

For now, consumption is being fuelled by credit. Armed with healthy balance sheets, NBFC lending to households is growing at 20 per cent and the momentum of banks’ unsecured personal lending has risen to 25 per cent. This comes on the back of a sharp increase in household leverage in recent years. For this not to backfire in the coming years, accelerating household incomes are the key.

The challenge, however, is more fundamental: How can labour be made a more attractive factor of production vis-à-vis capital in a world of increased automation and AI? India’s capital-labour ratio has been rising for more than two decades. Bending this curve should be our top policy priority. The challenges are new but the constraints are old: Ramping up education, skilling, health, rationalising labour laws, which push up the cost of labour, directing scarce fiscal resources to labour-intensive sectors.

Exports will need to complement private consumption. India’s goods exports have declined from 17 per cent of GDP a decade ago to 11 per cent. Policymakers must be commended for not succumbing to export pessimism and signing a slew of FTAs, beginning to rationalise tariffs and QCOs and allowing the exchange rate to depreciate. But for India’s exports to become more structurally competitive, factors of production will have to become much more enabling, tariffs and non-tariff barriers rationalised more decisively, and stifling overregulation slashed more holistically.

Boosting consumption and investment more structurally is the key to a sustained private capex cycle. In turn, private capex is the key to crowding in FDI and stabilising the balance of payments.

A strong cyclical pick-up and a raft of capital inflows is unambiguously good news. But these should be thought of as a means, not an end. They provide a bridge over troubled global waters. They buy India time to address the structural underpinnings of the economy. The good news: Corporate and financial sector balance sheets are clean, infrastructure is being ramped up and agriculture is in a sustained surplus. If we can boost demand structurally, the next growth cycle could be a long one.

But in a world where AI is sucking up capital, white-collar jobs are threatened, trade is getting more fragmented and weaponised, and the global order has broken down, the ask is only getting more daunting. The clock is ticking and there is no time to waste.

The writer is head of Asia Economics at J.P. Morgan