Robust growth is good but India is up against more pressing challenges in need of policy action

Notably for agriculture, nominal growth was just 1.4%, a sharp decline from over 8% in the two earlier years; it was last year’s sharp fall in agricultural prices that gave us real growth of 3%.

Deflation in agricultural commodities may have lifted real growth, but it is also responsible for a broader demand slump in the economy that has persisted for quite some time now. Lower prices hurt farmers, hurting profitability and incomes in rural areas.

This is also true for wage workers—regular workers also witnessed a decline in real earnings. As a result, private consumption, which has been the primary driver of India’s growth, saw its share decline from 57.1% of GDP in 2022-23 to 55.7% in 2025-26.

Private investment has been weak too, as have Indian exports. Further, falling foreign direct investment (FDI) and foreign portfolio investment (FPI) are pressuring India’s current account deficit. A reversal in these is unlikely in the short run. Most of these pressures were evident before the war in West Asia.

A key challenge for the government is to sustain growth. War-led disruptions are likely to result in higher inflation, some of which was captured by April’s 8% spike in the wholesale price index; consumer inflation has reached 4%. That inflation will stay on an incline has also been confirmed by the Reserve Bank of India’s latest estimates.

Further, with all predictions now confirming a severe El Niño phenomenon that may lead to deficient monsoon rains, the agricultural sector is likely to see output growth weaken. Supply shocks due to deficient rainfall will create additional inflationary pressures, even as increased fertilizer and energy prices push up cultivation costs. The net impact will be a further squeeze of the disposable income of most households. This impact is already showing.

In this backdrop, sustaining growth while ensuring macroeconomic stability will be a tough task for policymakers, especially amid the uncertainty the war and El Niño have caused. Since much of the present inflationary pressure is driven by fuel and food prices, monetary policy measures are unlikely to be effective. Rising inflation will, thus, combine with weak income growth to slow India’s economic expansion.

To be sure, tepid private investment in India by both domestic and foreign investors predated the Gulf war’s outbreak. The problem of a persistent demand deficiency, driven as it is by a sustained fall in farm and non-farm incomes among large sections of our population, goes back many years too. Therefore, sustaining growth will be challenging in the short run.

The government’s bigger challenge is to insulate the lives and livelihoods of the millions who work in the agricultural and other sectors on low wages. Recent policy initiatives by the government indicate a focus on ensuring macroeconomic stability and sustaining growth.

This is certainly desirable. But what India requires is government intervention to protect the vulnerable. This is not just imperative in the context of today’s crisis—whose neglect could create a humanitarian emergency of food security, incomes and livelihoods—but is also important as a way to revive and sustain GDP growth.

Restoring profitability in the farm sector and making an effort to raise wages are the only way to revive demand across the economy. This will require moving away from promoting austerity to increasing fiscal support for job creation and social protection measures, with food security a vital part of the programme.

Irrespective of short-run disruptions caused by the war and weather, reviving domestic demand through income and livelihood support should be India’s first priority in managing the oncoming crisis. That it would help sustain the economy’s growth makes it an especially compelling approach.

The author is associate professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi.