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Digital infrastructure in public finance has revolutionised welfare delivery and boosted financial inclusion
India has long been the brightest spot among the world’s major economies. Over the past decade, it has combined demographic vigour with policy improvements to deliver growth rates that many emerging economies can only envy. Yet, as the Narendra Modi government enters the midpoint of its third term in 2026, a clear-eyed assessment is essential.
Macroeconomic stabilisation has been a genuine achievement. But the point one cannot forget is that the tools that delivered macroeconomic stability are not the same as those needed for the sustained acceleration in total factor productivity and private investment that would transform India into a high-income economy. Without that shift, the country risks settling for respectable, sustained economic performance.
The foundations were laid after the shocks of the early 2010s, when India was one of the “Fragile Five” economies vulnerable to capital flight. Post-2014, the government rightly prioritised fiscal prudence and monetary policy credibility. The fiscal deficit, which exploded to 9.2 per cent of GDP in the pandemic-hit FY21, has been brought back under control. By FY26, the central government deficit was close to the 4.4 per cent target, supported by buoyant GST revenues, disinvestment and tighter expenditure control. General government consolidation has created breathing room. Capital expenditure has risen sharply—to around 3 per cent of GDP at the centre, closer to 4 per cent including states—marking a welcome reorientation from revenue to investment spending.
This fiscal discipline has paid dividends. Borrowing costs have fallen, sovereign ratings have been upgraded (notably in 2025), and India has avoided the vicious cycles of twin deficits that plagued it before. Combined with the formal adoption of inflation targeting in 2016, it has anchored inflationary expectations. Consumer price inflation (CPI) has settled near the Reserve Bank of India’s 4 per cent target, with recent readings around 3.9–4 per cent. This is a far cry from the volatile pre-2016 era. Predictable policy has shielded households and supported resilience against global headwinds, from energy price spikes to geopolitical tensions.
Digital infrastructure in public finance has been another standout success, which has revolutionised welfare delivery, slashed leakages in public expenditure, eliminated the ‘ghost beneficiaries’ of welfare programmes and boosted financial inclusion on a massive scale. Hundreds of millions of new accounts, many held by women, have expanded participation. These reforms have lowered transaction costs, encouraged formalisation and created one of the world’s most advanced payments systems. In an economy still grappling with informality, this is no small feat.
Trade policy has also become more outward-looking, with new agreements and Production-Linked Incentive schemes aimed at manufacturing self-reliance. External buffers are strong, with ample foreign exchange reserves cushioning oil import dependence.
Yet here the good news begins to thin. Private corporate investment has reached peaks near 12 per cent of GDP in recent years, but overall fixed capital formation remains below the levels needed for sustained 8 per cent-plus growth. Gross domestic savings have slipped to around 30.7 per cent of GDP (in FY24), dragged down by household financial savings under pressure from rising debt and consumption. Firms still lean heavily on internal accruals and banks. Recent liberalisations of external commercial borrowings (ECB) in 2026 may help, but they cannot substitute for deeper domestic financial development. Jio
Growth itself has been solid: an estimated 7.4–7.7 per cent in FY26, with projections for the next year moderating to around 6.5–6.9 per cent amid external risks. This is impressive. But India’s demographic window will not last forever. To absorb its vast young population into productive jobs, the economy needs a step change in total factor productivity and private-sector dynamism.
The employment challenge is particularly sobering. Official unemployment hovers around 5–5.2 per cent, but quality matters more than quantity. Youth joblessness and skill mismatches are acute. Rural female labour force participation has risen encouragingly, yet too often in low-productivity roles. Formal, high-wage employment creation lags.
Without broader structural change, the demographic dividend risks turning into a demographic burden.
Several other headwinds loom. Regulatory and policy uncertainties, combined with long-standing frictions in land and labour markets, continue to deter a full private investment revival. Geopolitical risks in the Middle East threaten energy prices and the current account. The current account deficit has started widening with the West Asia-related energy crisis. We are unable to finance the CAD with capital flows as the capital is flighty.
Climate commitments add another layer of complexity: India must square rapid growth with net-zero ambitions to enable a ‘just transition’, requiring massive green investment and technology transfer. Declining household savings and volatile foreign portfolio flows underscore the need for more resilient financing patterns. Even tax reforms, including the GST reforms, while substantial, leave pockets of uncertainty that complicate business planning and ease of doing business. The global minimum tax (pillar 2) has implied that globally corporate taxation needs to be 15 per cent, and India has done business taxation reforms.
The central insight here is straightforward, yet often overlooked: the instruments of macroeconomic stabilisation—fiscal consolidation and inflation targeting—are necessary but insufficient for sustained rapid growth. Macroeconomic stabilisation has created the platform. Now India must pivot to the full implementation of labour codes with tripartite consultations with trade unions, management and subnational governments; radical simplification of land acquisition, further capital market deepening, and aggressive skilling and formalisation drives.
Raising female labour participation towards 50 per cent could add a full percentage point to trend growth. Gender budgeting is a promising fiscal innovation to ensure high female labour participation by ensuring mobility and care economy infrastructure. Easing of doing business must move from central rhetoric to consistent state-level reality.
Public infrastructure capex has usefully crowded in some activity, but the private sector must take the lead. Recent external borrowing reforms and FDI openings are steps in the right direction. Yet predictability, policy stability and competition policy matter more. The digital infrastructure in public finance that served stabilisation so well should now be leveraged for climate finance, care economy support and next-generation inclusion. A cautious advance of central bank digital currency, alongside sensible crypto regulation, fits this framework. The challenges from AI need to be tackled with caution. RBI’s FREE report provides a brilliant framework for sandbox testing of AI tools.
India’s macroeconomic framework is far sounder than a decade ago. Rating upgrades and resilient buffers reflect that. But the $5tn-plus economy goal, and the broad-based prosperity it implies, will not materialise on macroeconomic stabilisation alone.
As global conditions remain turbulent—with trade fragmentation, energy insecurity and slowing Chinese growth—India’s pragmatic, macroeconomic stability-oriented approach offers valuable lessons for other emerging markets. Yet the next phase of growth-oriented reforms will be decisive. If India fails to shift from consolidation to bold productivity-enhancing structural policies, it will underperform its potential. Success, conversely, would not only transform the lives of 1.4bn people but also reshape the global economic landscape. The tools are known to economists. Execution is now the test.
The author is a professor at the National Institute of Public Finance and Policy, New Delhi.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.
