Strong growth with macro stability: Is India’s economy on an impressive new path?

An average growth rate of 7.6% in the first half of the financial year has sent economic forecasters back to their spreadsheets and statistical models. Economic growth is now forecast to be close to 7%, or perhaps even higher, unless the six months from October see a sharp slowdown.

Meanwhile, the Reserve Bank of India expects consumer price inflation to be 2.6% over the entire year ending in March 2026, or 1.4% lower than what economists at the central bank had forecast in April.

And the current account deficit is likely to be less than 1% of gross domestic product (GDP), though weak inflows of net foreign capital continue to keep the Indian rupee under pressure despite a narrow external deficit.

The first number (GDP) is an indication of economic momentum, while the other two (inflation and current account deficit) are measures of economic stability.

This does not mean that there are no problems on the ground—corporate investment continues to be weak, job growth has been anaemic and consumer demand is held back because of inadequate growth in household incomes, for example. The spectre of global instability is also a worry.

Yet, taken together, the three big macroeconomic numbers paint the picture of an economy that is expanding without triggering either high inflation or an unmanageable current account deficit.

A quick look at data from other countries shows that India is the fastest growing major economy by a large margin, while its inflation is in the same range as many rich countries that have traditionally had far less price pressure compared to India.

The big question is whether the current combination of high growth with economic stability is a sign of deeper structural changes in the Indian economy or a transient phenomenon aided by special circumstances, including a low deflator that exaggerates real economic growth. A useful starting point is to compare the current situation with the situation over the past two decades.

In the first block of 10 years, from 2005-06 to 2014-15, the Indian economy maintained an average annual growth rate of 7.8%, helped by a blistering pace maintained in the three years immediately preceding the North Atlantic financial crisis.

This impressive show was accompanied by an average consumer price inflation rate of 8.5% and a current account deficit that averaged 2.3% of gross domestic product. The pressure on prices as well as the external balance was a sign of excess demand in an overheating economy.

The next block of 10 years, from 2015-16 to 2024-25 was against the backdrop of a slowing world economy, and a pandemic shock that the Indian economy bounced back from.

Economic growth in India averaged a more modest 6.1% a year. However, this lower growth rate came along with far greater economic stability. Consumer price inflation averaged 4.5% a year while the current account deficit was 1% of gross domestic product.

There were thus two different paths over the past two decades.

The first path saw very rapid economic expansion accompanied by high inflation as well as episodes of a widening current account deficit.

The second path saw a relatively more modest growth record but also a much more stable economy. In fact, economic narratives have shifted from analysing excess demand pressures to worrying about weak domestic purchasing power.

The line-up of macroeconomic statistics for this current year is thus a halfway house between what happened from 2005-06 to 2014-15 on one hand, and from 2015-16 to 2024-25 on the other. Growth is faster than the second period, while inflation and the current account deficit are lower than the first period.

This matters because India needs to accelerate its economy even beyond its current rate if the goal of becoming a developed country by 2047, the centenary of our independence from foreign colonial rule, has to be met. The rate of economic growth needs to be sustained at well over 8% a year over the next two decades if the average Indian is to achieve a lifestyle on par with his or her peers in developed countries.

The problem is that firing up growth without underlying changes in the efficiency, productivity and competitiveness of the economy will almost inevitably lead to episodes of economic instability. The recent record of higher economic growth with greater economic stability offers a tantalizing possibility that India is moving towards a higher level of potential growth, admittedly a hazy concept even at the best of times.

Any such optimistic conclusion needs to be tempered with the knowledge that the recent combination of greater economic momentum with fewer price pressures is too limited to make any grand conclusions for the medium term. But it does hint at interesting possibilities.

The author is executive director at Artha India Research Advisors.