The 6.5% Conundrum, Is India Stuck in a Growth Trap and Running Out of Ideas?

The 6.5% Conundrum, Is India Stuck in a Growth Trap and Running Out of Ideas?

In the intricate tapestry of economic policymaking, consensus is rare. When it does emerge, it demands attention. Today, a sobering consensus has crystallized around India’s economic trajectory: the nation’s potential growth rate has settled at approximately 6.5% per annum. This figure, recently underscored by the venerable former RBI Governor, Dr. C. Rangarajan, at the age of 93, has become the new economic reality. While Dr. Rangarajan charitably described it as “reasonably high” in the current global context, he immediately sounded a cautionary note, highlighting its inadequacy for generating sufficient employment. This diagnosis, emerging from a respected figure and echoed by major domestic and international institutions, is not a cause for celebration but a stark warning. It suggests that India is perilously lodged in a lower-middle-income trap, unable to muster the policy creativity or political will to break free and realize its immense potential.

The Unanimous Verdict: A Plateau of Potential

The chorus of institutions aligning with Dr. Rangarajan’s assessment is telling. The Reserve Bank of India (RBI), in its September 2025 bulletin, revised its growth estimate for 2025-26 upwards from 6.5% to 6.8%, a modest and likely temporary fluctuation. More revealing is what the RBI, and the government’s own Monthly Economic Review from August, largely gloss over: the simmering crisis of unemployment. The RBI’s brief mention of a declining unemployment rate to 5.1% feels almost perfunctory, especially when measured against its mandate to secure price stability “with preference to employment.”

The international perspective reinforces this plateau. The World Bank estimates growth at 6.5% for 2025-26, trimming it to 6.3% the following year. The International Monetary Fund (IMF) projects 6.5% for 2025, falling to 6.2% in 2026. The Organization for Economic Co-operation and Development (OECD) offers a slightly more optimistic 6.7% for 2025-26, but also predicts a drop to 6.2% thereafter. This international convergence is significant; it indicates that global experts see structural, not cyclical, factors at play. India’s dream of sustained 8-9% growth—the kind that rapidly transforms nations and lifts millions from poverty—has receded, replaced by a more modest and stubbornly static outlook.

The Spoiler: The Stagnant Engine of Investment

The critical question is: why has India’s growth potential seemingly capped itself at 6.5%? The answer lies in a single, crucial metric: Gross Fixed Capital Formation (GFCF). GFCF represents the total investment in physical assets like machinery, buildings, and infrastructure, and it is the primary engine of long-term productive capacity. Here, the data paints a alarming picture.

GFCF has experienced a dramatic secular decline, falling from a robust 38.8% of GDP in 2007-08 to a mere 30.1% in 2024-25. Even more concerning is that this rate has been “more or less stationary” over the past decade. This stagnation signifies that the economy is not building new productive capacity fast enough to fuel a higher growth rate. The situation is particularly dire in the private sector. Private Fixed Capital Formation (PFCF), a subset of GFCF, has fallen from 27.5% of GDP in 2007-08 to 23.8% in 2022-23 (the last available official data). This private investment strike is the central nervous system of the growth problem.

Why is Private Capital on Strike?

Indian corporations are sitting on vast cash reserves, but they are demonstrably unwilling to invest them in new greenfield projects within the country. The reasons are multifaceted and deep-seated:

1. The Trust Deficit: The foremost reason, as the column notes, is a profound “trust deficit between the government of India and the industry.” Despite Finance Minister Nirmala Sitharaman’s efforts—her “retreats, admonitions, or threats”—Indian investors remain unimpressed and skeptical. Policy unpredictability, the perceived overreach of investigative agencies, and a regulatory environment that can often feel punitive have created a climate of fear and uncertainty. When the rules of the game are perceived as opaque and subject to change, the rational response for a business is to delay irreversible investment decisions.

2. The Lure of Alternatives: With domestic demand perceived as uncertain and the investment climate challenging, corporations are pursuing safer alternatives. They are hoarding cash, engaging in the acquisition of already insolvent companies through the IBC process (which does not create new capacity), or increasingly, investing abroad. Capital flight, even by Indian-owned companies, is a silent referendum on the domestic investment climate.

3. The Infrastructure Quality Paradox: The government has rightly focused on infrastructure spending. However, the column delivers a scathing indictment of the outcomes: “the quality has been appalling.” From obsolete designs and technology to collapsing bridges and buildings, and new highways that wash away with the first rain, the return on this colossal public expenditure is severely diminished. Poor-quality infrastructure increases the operational costs and risks for private businesses, acting as a further disincentive to invest. Why set up a factory near a new industrial corridor if the power supply is unreliable and the access road is crumbling?

The Human Cost: The Mirage of Employment and the Youth Anarchy

A 6.5% growth rate is not just a statistical abstraction; it has dire human consequences, primarily manifested in a severe employment crisis. The official unemployment rate of around 5% is a statistical artifact that masks a dystopian reality. It is a “joke,” as the column bluntly states, in the same way that official retail inflation figures often fail to capture the ground-level price pain.

The real story is in the disaggregated data:

• Educated Unemployment: The unemployment rate for the educated is a staggering 29.1%. This means nearly one in three Indians with an education is unable to find a job. This represents a catastrophic waste of human capital and a ticking social time bomb.

• Youth Unemployment: The situation for the youth is even more alarming, with a rate of 45.4%. A country with one of the world’s youngest populations cannot sustain such levels of idleness and disillusionment without inviting severe social unrest.

For those without formal education, the scenario is one of distress-driven migration or underemployment in “dood and irregular jobs.” The much-touted demographic dividend is rapidly threatening to become a demographic disaster. The 6.5% growth model is simply not labor-absorbent enough. It is a model that may benefit capital and automation but fails the millions of young Indians entering the workforce each year.

The Way Forward: Summoning the Courage to Reform

The diagnosis is clear: India is stuck. The 6.5% growth rate is the symptom of a deeper malaise—stagnant investment, a debilitating trust deficit, and a jobless growth pattern. Breaking out of this lower-middle-income trap requires more than tinkering at the margins; it demands a fundamental shift in approach, one that the column evocatively frames as requiring “Mammohan Singh-like courage.”

What would such courage entail today?

1. Bridging the Trust Deficit: The government must initiate a genuine, structured dialogue with industry to restore confidence. This goes beyond speeches and involves providing a stable, predictable, and transparent policy regime. It means ensuring that tax laws are not applied retroactively and that regulatory actions are perceived as fair and consistent, not arbitrary.

2. Unlocking Private Investment: Policy must actively incentivize risk-taking in new projects. This could involve deeper tax breaks for new manufacturing investments, faster clearances, and a concerted effort to reduce the cost of doing business. The government must move from being a regulator to being a facilitator.

3. A Quality Revolution in Infrastructure: The focus must shift from the quantity of infrastructure spent to the quality of infrastructure delivered. This requires adopting global best practices in engineering, implementing ruthless quality control, and ensuring accountability for failures. A national infrastructure audit could be a starting point.

4. Making Employment the Central Target: Every policy, from production-linked incentives (PLIs) to infrastructure projects, must be evaluated through the lens of job creation, especially for the youth. This may require favoring more labor-intensive sectors and models in the short to medium term, even at the cost of some efficiency.

The 6.5% consensus is a wake-up call. It is a moment for introspection, not triumphalism. India possesses the entrepreneurial spirit and the human capital to achieve much more. What it lacks is not potential, but the political courage to implement the deep-seated reforms necessary to unlock it. The path forward is difficult, but the cost of inaction—a perpetually frustrated, underemployed population and a nation forever on the cusp of greatness—is infinitely greater.

Q&A Section

Q1: What is the “6.5% consensus” and why is it significant?
A1: The “6.5% consensus” refers to the unanimous assessment by leading economic institutions and experts, including former RBI Governor Dr. C. Rangarajan, the RBI itself, the World Bank, the IMF, and the OECD, that India’s potential economic growth rate has settled at around 6.5% per annum. This is significant because it marks a departure from the earlier ambition of achieving sustained 8-9% growth. It indicates that the economy is facing structural, not temporary, hurdles, and that without major policy interventions, India may be stuck in a “lower-middle-income trap,” unable to rapidly increase its per capita income.

Q2: What is GFCF, and why is its decline considered the main “spoiler” of high growth?
A2: GFCF, or Gross Fixed Capital Formation, measures the total investment in new physical assets like factories, machinery, and infrastructure. It is the fuel for future productive capacity. Its decline from 38.8% of GDP (2007-08) to 30.1% (2024-25) and subsequent stagnation means the Indian economy is not building new capacity fast enough. Since you cannot produce more goods and services in the future without investing in the means to produce them today, a stagnant GFCF acts as a direct cap on the economy’s potential growth rate.

Q3: The article mentions a “trust deficit” between the government and industry. What does this mean in practical terms?
A3: In practical terms, the “trust deficit” means that private businesses lack confidence in the policy environment. They fear unpredictable changes in tax laws (like retrospective amendments), perceive regulatory actions as arbitrary or punitive, and are uncertain about the long-term stability of government policies. This climate of uncertainty makes corporate leaders hesitant to make large, long-term, and irreversible investments in new projects within India. They instead choose to hoard cash, acquire existing assets, or invest in more predictable foreign markets.

Q4: How does the official unemployment rate of ~5% hide the true scale of the jobs crisis?
A4: The official, all-India unemployment rate is an average that masks severe disparities. When the data is broken down, it reveals a catastrophic situation for specific groups. The unemployment rate for educated youth is 29.1%, and the overall youth unemployment rate is 45.4%. This means the burden of joblessness falls disproportionately on the very segment of the population that is most aspirational and whose productive employment is crucial for the demographic dividend. The 5% figure is thus a misleading average that conceals a deep and socially explosive jobs crisis.

Q5: What is meant by the call for “Mammohan Singh-like courage” to break out of the current growth trap?
A5: The phrase refers to the bold, paradigm-shifting economic reforms of 1991, spearheaded by Dr. Mammohan Singh as Finance Minister, which dismantled the License Raj and unleashed decades of high growth. The call for similar “courage” today implies that incremental policy changes are insufficient. It demands similarly bold, politically difficult reforms to address the root causes of stagnation: rebuilding trust with industry, implementing a genuine ease of doing business, fixing the broken financial system, and prioritizing quality job creation as the central goal of economic policy. It is a call for a second generation of reforms to meet the challenges of the 21st century.