Economy’s Potential Growth Rate Has Moved Higher, The Economic Survey’s Assessment of India’s Medium-Term Prospects
Each year, the Economic Survey triggers intense discussion about India’s growth in the coming 12 months. Yet the more consequential question lies beyond the next fiscal year: has India’s underlying capacity to grow on a sustained basis increased? The Survey’s latest assessment suggests that it has.
Survey 2022-23 had placed India’s potential growth at about 6.5%, with the possibility of rising to 7-8% if domestic reforms were pursued consistently. Three years on, after a steady cycle of reform and the resilience exhibited by India’s macroeconomic fundamentals, this Survey now revises India’s medium-term potential growth to around 7%.
This is not a dramatic upgrade, but a consequential one. It reflects the cumulative impact of reforms that have been sustained rather than episodic—reforms that are beginning to lift the economy’s underlying productive capacity.
The Reform Momentum
Over the past few years, reform momentum has broadened across multiple fronts relevant for long-term growth. Manufacturing-oriented initiatives such as PLIs, calibrated liberalisation of FDI, and logistics reforms have supported capacity creation. Efforts to improve regulatory predictability including tax simplification and closer Centre-state coordination on regulatory reforms, have reduced policy uncertainty for investors.
For SMEs, expanded credit guarantees, wider use of digital platforms for receivables financing, and the rollout of Unified Lending Interface have sought to ease long-standing credit constraints. These measures have been reinforced by sustained public investment in both physical and digital public infrastructure.
Rapid growth of highways, ports and railways, the rise of inland waterways, and the doubling of India’s airport network over the past decade have eased logistics bottlenecks and improved connectivity. These changes lower costs across the economy and make it easier for firms to scale, compete and invest.
The Synergy of Reforms
The significance of this broad-based reform push lies less in any single initiative than in the way these measures reinforce one another, altering incentives across investment, hiring and firm behaviour. Reforms in taxation, infrastructure, digital systems, and factor markets are not isolated; they interact.
When logistics improve, firms can reach larger markets. When digital payments become seamless, transaction costs fall. When credit is more accessible, SMEs can invest. When regulation is predictable, investors commit. The whole becomes greater than the sum of its parts.
Crucially, these reforms have coincided with healthier corporate and banking balance sheets. After a decade of stress and deleveraging, firms are better placed to invest and expand. Improvements in tax administration and rising formalisation have further strengthened the institutional environment.
The Growth-Accounting Framework
At its core, this Survey’s argument is a growth-accounting one: sustained expansion depends on capital accumulation, labour input and productivity—and on how efficiently these elements interact.
Capital: On capital, the post-pandemic period has been marked by a sustained public investment push rather than sporadic increases. The government’s capital expenditure has risen from ₹7.4 lakh crore in 2022-23 to ₹10.5 lakh crore in 2024-25. This has occurred alongside reforms in logistics, regulation and digital systems that improve capital productivity.
International experience suggests that sustained public infrastructure investment can crowd in private investment when financial-sector balance sheets are healthy. Rising capacity utilisation and new project announcements indicate that this process is now underway. The implication is straightforward: capital stock growth is expected to return to its pre-pandemic pace in the medium term, this time supported by stronger institutional and balance sheet conditions.
Labour: In the labour market, deeper structural shifts are also visible, reflected in rising participation, greater formalisation and improving employability. According to the Periodic Labour Force Survey, the female labour force participation rate increased from 23.3% in 2017-18 to 41.7% in 2023-24. This is a dramatic improvement, reflecting both increased opportunities and changing social norms.
Formal employment and social security coverage have expanded as well, with net EPFO additions more than doubling between 2018-19 and 2024-25. Alongside this, labour law consolidation, reduced regulatory compliance and state-level reforms are lowering labour-market frictions, while investments in education, skill and apprenticeship schemes are strengthening workforce quality. Taken together, these trends point to labour input growth stabilising at a higher level than before the pandemic.
Productivity: As capital and labour set the stage, productivity determines how effectively they are used. In India, total factor productivity growth slowed in the immediate post-pandemic years, a pattern seen across many emerging economies. But this is precisely where India’s reform trajectory holds promise.
Digital public infrastructure—Aadhaar, UPI and GST—has lowered transaction costs, improved compliance and shortened settlement cycles. Easier firm entry and exit have improved allocative efficiency by allowing resources to move towards more productive uses. These gains are reinforced by reforms in infrastructure, logistics, insolvency resolution and regulation.
While early benefits have appeared in the form of improved financial inclusion, a broader tax base, stronger compliance and better service delivery, deeper efficiency gains typically materialise over time. This Survey therefore builds in a steady improvement in trend productivity growth over the coming years, reflecting the maturation of these institutional and technological changes.
The Revised Estimate
Taken together, these calibrated improvements in capital formation, labour input and productivity imply an upward shift in India’s medium-term potential growth, from about 6.5% to around 7%. This is not a dramatic upgrade, but it is a meaningful one. In growth terms, an additional 0.5 percentage points per year compounds to a significantly larger economy over time.
The Conditionality
This higher growth frontier, however, is not automatic. International experience shows that such accelerations endure only when reforms are persistent and macroeconomic stability is preserved. India’s growth capacity appears to have strengthened. Whether this higher frontier becomes a durable reality will depend on preserving stability, and extending the reform momentum that enabled the shift.
The Survey’s message is clear: the potential is there, but it must be realised through continued effort. Stability has been earned; growth must be built.
Q&A: Unpacking the Potential Growth Upgrade
Q1: What is India’s revised potential growth rate according to the Economic Survey 2025-26?
The Survey revises India’s medium-term potential growth to around 7%, up from about 6.5% estimated three years ago. This reflects the cumulative impact of sustained reforms across multiple fronts—manufacturing incentives, FDI liberalisation, logistics, regulatory simplification, and digital infrastructure—that are lifting the economy’s productive capacity.
Q2: What evidence supports the upgrade in capital accumulation?
Government capital expenditure has risen from ₹7.4 lakh crore in 2022-23 to ₹10.5 lakh crore in 2024-25. This sustained public investment push has been accompanied by reforms in logistics, regulation, and digital systems that improve capital productivity. Healthy corporate and banking balance sheets, rising capacity utilisation, and new project announcements suggest private investment is being crowded in.
Q3: What labour market improvements does the Survey highlight?
Female labour force participation increased dramatically from 23.3% in 2017-18 to 41.7% in 2023-24. Formal employment has expanded, with net EPFO additions more than doubling between 2018-19 and 2024-25. Labour law consolidation, reduced compliance burdens, state-level reforms, and investments in education and skills are strengthening workforce quality.
Q4: How does digital public infrastructure contribute to productivity gains?
Aadhaar, UPI, and GST have lowered transaction costs, improved compliance, and shortened settlement cycles. Easier firm entry and exit allow resources to move to more productive uses. While early benefits include improved financial inclusion and a broader tax base, deeper efficiency gains are expected to materialise over time as these institutional changes mature.
Q5: Is the higher growth frontier guaranteed?
No. International experience shows that growth accelerations endure only when reforms are persistent and macroeconomic stability is preserved. The upgrade reflects strengthened capacity, but realising it as durable reality depends on extending the reform momentum and maintaining stability. The potential exists; realisation requires continued effort.
