India's Potential Growth Rate Analysis

The potential growth rate for India is estimated at 6.5%, considered high in the current global context. However, the actual growth rate shows variability across different quarters and sectors.

Quarterly GDP and GVA Growth

• In the first quarter of 2025-26, GDP growth was 7.8%, lower than the first quarter average of 9.9% over the previous three years (2022-23 to 2024-25).
• Annual GDP growth rates were 7.6%, 9.2%, and 6.5% for the years 2022-23, 2023-24, and 2024-25, respectively.
• Real GVA growth in the first quarter of 2025-26 stood at 7.6%, lower than the 9.5% average in previous years.
• Growth in manufacturing for the first quarter of 2025-26 was notable at 7.7%, compared to a previous average of 5.8%.

Service Sector Growth

• Key service sectors such as trade, transport, financial, and public administration saw growth rates of 8.6%, 9.5%, and 9.8% in Q1 of 2025-26. However, these were lower than their previous averages of 12.9%, 11.3%, and 13.1%.

Gross Fixed Capital Formation and ICOR

• The real Gross Fixed Capital Formation Rate (GFCFR) has been stable around 34.5% from 2023-24 to 2025-26.
• ICOR remains volatile due to its dependence on GDP growth fluctuations. An ICOR of 5.2 indicates capital usage efficiency.
• For potential growth to exceed 6.5%, GFCFR needs to increase beyond the current average or ICOR should decrease below 5.2.

Public Sector's Role in Investment

• The public sector's share in total real GFCF rose from 21.6% in 2021-22 to 25.1% in 2023-24.
• Central government-led investment growth showed a decline, with rates dropping from 39.4% in 2021-22 to 10.8% in 2024-25.

Factors Influencing Long-term Growth

• Technological advancements such as AI and Gen AI could positively affect growth.
• Aging capital and the need for new technologies might necessitate faster capital replacement.
• Global trade uncertainties due to tariffs and supply chains challenge India's growth diversification efforts.

Policy Implications

To enhance the potential growth rate above 6.5%, there is a need for:

• Increasing private sector investment, which has decreased from 37% to 34.4%.
• Addressing factors hindering private investment and proposing solutions.

The analysis presented is by C. Rangarajan, Chairman, Madras School of Economics, and D.K. Srivastava, Honorary Professor at Madras School of Economics, reflecting their personal views.