The Indian Economy: Growth, Investment and Stagnation

Sushil Khanna & Mritiunjoy Mohanty

Ever since NDA-II came to power in 2014 under the leadership of Narendra Modi on the so-called development plank and with a promise to put an end to the apparent policy paralysis blamed on the Manmohan Singh led UPA-II government, a comparative analysis of Indian economic performance has faced many challenges.

First the new series of National Accounts (2011-12 base year) has made a direct comparison with UPA era of high growth difficult. Second, the NDA-II era the Indian economy faced two major policy induced shocks–demonetisation of the currency and flawed implementation of the GST. Finally, the unanticipated Covid shock which was exacerbated by Government of India imposing the world’s most draconian lockdown.

Therefore, rather than a full blown comparative analysis, in this short note we analyse the performance of the Indian economy from 2011-12 to 2024-25, using the latest release of new series of National Accounts data (30th May 2025). For the purposes of exposition and delineating different growth phases, we have divided the period from 2011-12 to 2024-25 into four sub-periods: Period I -2011-12 to 2015-16–in response to significant inflationary pressures, the period of tight monetary policy and disinflation (it also covers the last two years of UPA-II and the first two years of NDA-II); Period II -2016-17 to 2019-20–is the period of monetary easing and policy shocks–demonetisation and GST implementation; Period III–2020-21 to 2024-25–is the Covid pandemic and its aftermath which includes both the year of the Covid shock as well as the sharp rebound; and finally, Period IIIa–2022-23 to 2024-25–a sub-period of Period III, is the post-Covid-rebound growth performance.

For any economy, from the demand side there are three main sources of growth: consumption, investment and net exports. Consumption demand is normally the largest–in India’s case, ranging between 60-65% of GDP in the recent past; followed by investment demand, between 25-40% in India’s case; and finally net exports (exports-imports) which in India’s case range between -2 and -5%. Consumption therefore is an important direct driver of GDP growth. Investment drives GDP growth by expanding supply (assuming there is sufficient demand) and/or productivity-driven wage growth (which in turn drives consumption). Exports are a source of external demand, though one has to take into account imports to get a sense of the net effect.

For all the brouhaha about becoming the 4th largest economy in the world as well as the fastest-growing, the Indian economy is not in good shape at all and is structurally damaged. One of the defining aspects of India’s recent growth experience has been its inability to sustain a high-growth path, i.e., it sees repeated episodes of growth deceleration. Whereas, as we will see below, weakness in consumption growth is a contributing factor, what is truly unusual is that the GDP growth does not sustain despite the recovery of investment growth in the post-Covid period. It is this unusual aspect and its ramifications that we explore in some detail below.

GDP growth trends: Perhaps the most remarkable aspect of Table 1 (as well as the associated Graph 1) is the difference in growth performance in terms of current and constant prices. GDP growth at constant prices measures growth stripped of inflation. For example, if current price GDP grows at 5% and inflation (GDP deflator) is running at 5%, then constant price GDP will grow at 0% or in other words it will not have not grown at all. Constant price GDP growth is important for standard of living whereas current price GDP growth has an important bearing on profit and tax-revenue growth, both nominal categories.

Therefore, when current and constant price growth performance move in tandem (for example, they accelerate or decelerate broadly together) the two measures do not yield conflicting signals. Whereas, when the fall in inflation (disinflation) is really sharp, bordering on deflation, current price GDP growth might decelerate while constant price GDP growth accelerates. Deflationary tendencies then adversely affect expectation of profit growth, and therefore future investment, making the constant price GDP growth acceleration difficult to sustain.

As the Graph 1 makes clear, in Period I (2011-12 to 2015-16) GDP growth in current prices decelerates (from 13.8% in 2011-12 to 10.5% in 2015-16), whereas in constant prices accelerates (from 5.5 to 8%), the result of sharp disinflation during Period I. The differences between constant and current growth performance is also brought by the fact that whereas Period IIIa is fastest growing period in terms of constant prices, Period I (tight monetary policy and disinflation) is the fastest growing in terms of current prices. However, as we have already noted, in the face of divergence between current and constant price GDP growth in Period I, acceleration in the latter is difficult to sustain in Period II (2016-17 to 2019-20).

Therefore, in Period II both decelerate–current price GDP growth from 11.8 to 6.4% and constant price GDP growth from 8.3 to 3.4%. Hence Period II growth averages for both constant and current prices are lower than Period I’s, (see Table 1). It will be remembered that Period II is characterized by two major policy shocks- demonetization and flawed implementation of GST. The sharp deceleration in current and constant price GDP growth in Period II tell us that even before the Covid shock of 2020-21, the economy was in a very parlous state.

Perhaps equally importantly, in Period IIIa, the averages for the GDP growth at current (11.9%) and constant (7.8%) prices noted in Table 1, obscure the decelerating trend in both. In 2021-22 GDP at current prices grew at 18.9%; by 2024-25, it had secularly declined to 9.8%, a fall of almost 50%. Similarly, over the same period, GDP growth at constant prices fell, though not secularly, from 9.7 to 6.5%, decline of 33%. Again that current price GDP falls so much more that constant price GDP suggests that disinflationary forces are at play. Both the RBI and IMF forecast for 2025-26 suggest that growth is stuck in the 6.4-6.5% range.

Our central conclusion from this review of the Indian economy’s recent growth performance is that, despite being the fastest growing economy in the world, a combination of policy shocks and sustained disinfla-tionary pressures has meant that it has found it very difficult to sustain a high growth momentum necessary for transitioning to a developed economy, and therefore repeatedly decelerates. That the economy is unable to sustain a high-growth momentum and is decelerating in current (nominal) prices as well has implications not only for government’s tax revenue collections, but more importantly, dampens expectations of profitability which are an important driver of private corporate investment growth.

Consumption growth: Table 1 also tells us that the deceleration in GDP growth is not uniform across demand categories–consumption and investment exhibit very different growth tendencies. Private final consumption (PFCE) growth at constant prices is mostly flat, exhibiting a mild deceleration from Period I to IIIa. In Period IIIa it clearly grows slower than GDP. Total consumption (PFCE+GFCE) at constant prices decelerates from Period II to IIIa. In Period IIIa it grows slower than both GDP and PFCE. At current prices the behaviour of consumption is slightly different. In general, both total consumption and PFCE has grown faster than GDP. However Period IIIa consumption growth is clearly slower than Period I (disinflation period). It is also worth pointing out that the weakness in consumption growth has different across periods.

Period II (2016-17 to 2019-20) is characterised by weakness in rural consumption growth, largely driven by the nature of policy shocks and their asymmetric impact across rural and urban geographies. Period III on the other hand is characterised by weakness of urban consumption growth (CII President Rajiv Memani “Urban consumption is not growing as anticipated, Business Standard, 7th July 2025), reflecting stagnant wage growth in the urban economy Therefore, there is a persistent weakness in consumption growth, driven by different geographical drivers over time, complicating the policy response. And that perhaps is the reason for India’s growth stagnation. We hope to return to this important topic in another piece. Finally, it is also worth noting, as Table 1 makes clear, that at constant prices, exports (goods+services) have grown slower than GDP in Periods I, II and IIIa, i.e., external demand has not been an important driver of overall demand growth.

Investment growth: On the other hand, investment growth, both gross as well a fixed capital formation, actually accelerates from Period I, where it grows significantly slower than GDP, through to both Periods II, III and IIIa where in constant terms it grows faster than GDP. Therefore, it is worth emphasizing that GDP growth deceleration in Period III particularly is despite an acceleration in gross and fixed investment growth. This is a completely novel state of affairs for the Indian economy.

In Period I the brunt of disinflation is borne by a sharp slowdown in investment growth–at constant prices, fixed investment grows at 3.9% while GDP grew at 6.8%; at current prices it grew at 7.2 and 12.1% respectively. After Period I however, as Table 1 makes clear, in every subsequent period, at constant prices fixed investment has grown faster than GDP. In Period II, at current prices, the trend is not as clear cut as at constant prices, even though there is an appreciable increase in investment growth, indicating the persistence of deflationary tendencies in investment behaviour. However, even at current prices, in Period III as well as IIIa, fixed investment grows faster than GDP. As a result of the above, at constant prices, the fixed investment ratio (and as Graph 2 indicates) first falls from 34.3 in 2011-12 to a low of 30.8 in 2016-17 and then climbs back to 33.7% in 2024-25. Between 2021-22 to 2024-25 the ratio has been stable, rising slightly from 33.4 to 33.7%, not too far from the peak achieved in 2011-12.

In Period II (2016-17 to 2019-20), hammered by continuing deflationary tendencies particularly in investment as well as policy shocks of demonetisation as well as a flawed GST implementation, the economy grows the slowest of all four periods under consideration–6.3 and 9.9% at constant and current prices respectively (see Table 1). In Period IIIa (2022-23 to 2024-25) average growth recovers to 7.8 and 11.9% respectively at constant and current prices. However, as we have already noted even in Period IIIa the economy is unable to sustain the growth momentum and decelerates significantly.

Drivers of investment growth: Given the acceleration of investment as well as the slowdown in consumption noted above, the drivers of growth in these three phases are very different. In Period I (2011-12 to 2015-16), the phase of inflation stabilisation where the brunt of the adjustment is borne by investment, private consumption, at 56%, is the main driver of growth with fixed investment contributing only 19%. In Period II, the phase of the growth slowdown, even though the contribution of fixed investment increases to 35%, that of private consumption also rises to 59%. In Period IIIa, the phase of growth recovery, the contribution of consumption falls to 55% and that of fixed investment increases further to 41%. Clearly then, Phase IIIa growth is investment driven. Unpreceden-tedly, despite this investment driven growth, the economy decelerated in this phase too.

Institutional drivers: At constant prices, more than 70% of fixed investment in Indian economy is done by the private sector, comprising households and small unincorporated enterprises (HH) on the one hand and the large private corporate sector (PCORP) on the other. The two taken together accounted for 77.9% of fixed investment in 2011-12. By 2023-24 this had declined to 74%. Public investment, comprising PSU and Government investment, taken together accounted 21.2% of fixed investment in 2011-12. By 2023-24, their share had risen to 24.8%. On the face of it this suggests that over the period 2011-12 to 2023-24 the share of private investment has declined somewhat and that of public investment has risen.

There is however more to it than meets the eye. The brunt of the investment slowdown in Period 1(2011-12 to 2015-16) is borne by the HH sector. Therefore, its share falls from 45.9% of fixed investment in 2011-12 to 32.7% in 2015-16. Over the same period, PCORP, PSU and Govt shares rise from 32, 11 and 10.2% to 40.3, 12.8 and 12.8%, respectively. From 2015-16 however there is another turnaround. By 2023-24, the share of the HH sector had recovered to 40.5%. The share of PCORP had declined to 33.6, the share of PSUs to 11.9 whereas that of the Govt had increased marginally to 12.9%. All this to say that the investment growth recovery in Period IIIa was driven largely by the HH sector followed by Govt. investment. PCORP and PSUs, relatively speaking, sat on the side lines.

Composition of fixed investment: Besides a change in institutional drivers there has also been a change in composition of fixed investment at constant prices. In 2011-12, 58% of fixed investment comprised dwellings and other buildings. Machinery and equipment accounted for 35%. By 2015-16, dwellings and other buildings had fallen to 53% and machinery and equipment risen marginally to 36%. By 2019-20 (end of Period II) share of dwellings and other buildings fell further to 51% and machinery and equipment had risen to 38%. By 2023-24, the share of dwelling and other building had recovered to 55% and that of machinery and equipment had declined to 35%. That fixed-investment growth is not driven by machinery and equipment will surely have adverse implications for labour productivity growth.

When we put together the changes in institutional drivers and composition of fixed investment the following pattern emerges: the investment-driven growth recovery of Period IIIa (2022-23 to 2024-25) is, at the margin, fuelled by HH sector on the one hand and Government investment on the other and was driven by investment in ‘dwellings and other buildings’ rather than ‘plant and machinery’. The PCORP sector, and to a lesser extent PSUs, did not participate in the fixed investment surge in Period IIIa. The deceleration in current price GDP growth rates and its impact on expectation of profitability, discussed at some length above, had come home to roost and explains at least to some extent the hesitation of domestic PCORP investment.

This hesitation is in stark contrast to Indian corporate outward FDI. As TCA Sharad Raghavan using RBI data reports in the Hindu (22nd June 2025, Outward Investment Boom amid external enthusiasm amid internal caution in Indian industry), outward FDI increased from $4 billion in 2014-15 to $29 billion in 2024-25, almost 625%! It is also perhaps useful to remember in this context that during the investment-driven boom from 2004-05 to 2011-12 (during UPA I and II) when the fixed-investment ratio hovered around 32-34%, for 7-8 years, at the margin, investment was driven by private corporate capital on the one hand and machinery and equipment on the other. Little wonder then that the economy has not been able to sustain a growth momentum.

We close this essay with an observation on the efficiency of capital use or to put it simply, a measure of how well we use the capital we build and create by investing as an economy. One such measure is ICOR (incremental-capital-output-ratio). In 2021-22 the ICOR stood at 4.8. By 2024-25 this had marginally, but secularly, worsened to 5.3. That is say that our efficiency of using of capital we have created in the last few years by investing has worsened. If in an economy, despite demand growth being investment driven, consumption does not grow and capital is wasted, wouldn’t it be fair to say that it is stagnant and lifeless?

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Frontier Autumn Number
Vol 58, No. 14 - 17, Sep 28 - Oct 25, 2025