Subbarao Flags Private Funds, Jobs, Innovation as Risks to India’s Growth
Despite the concerns, RBI former governor maintained that India remained exceptionally well positioned to benefit from the ongoing realignment of global manufacturing and supply chains.
Former Reserve Bank of India governor Duvvuri Subbarao has cautioned that India’s impressive macroeconomic performance may not be enough to sustain high growth over the long term unless the country revives private investment, creates jobs on a much larger scale and strengthens its innovation capabilities.
Writing on the International Monetary Fund’s website, Subbarao said India’s recent “Goldilocks” phase was based on genuine achievements. In the post-pandemic period, real GDP growth averaged about 7 per cent, inflation remained broadly under control and fiscal consolidation progressed even as the country weathered major global supply shocks.
The banking sector had also emerged significantly stronger from the twin balance-sheet stress of the previous decade, with gross non-performing assets falling from more than 11 per cent at their peak to below 3 per cent. Corporate leverage had declined, profitability had improved and the government had substantially increased investment in roads, railways and logistics.
India’s digital public infrastructure, built around Aadhaar, the Unified Payments Interface and Direct Benefit Transfer, had meanwhile emerged as a global model for scalable digital finance.
But Subbarao said the central question was whether these achievements were “structurally sufficient to lift the economy onto a permanently higher, self-sustaining growth trajectory”.
Private investment still missing
The first major vulnerability, according to him, is the continuing weakness of private corporate investment.
Subbarao pointed out that India’s major growth accelerations in the past were driven by strong private capital expenditure. Although the country’s overall investment rate is around 33 per cent of GDP, private corporate investment remains at about 11 per cent, well below its peak of nearly 17 per cent in 2008.
“This imbalance matters,” he wrote, arguing that government investment could stimulate economic activity but could not indefinitely substitute for businesses investing in factories, technologies and new supply chains.
He described the present situation as a paradox. Corporate cash reserves were healthy, banks were in a strong position to lend and infrastructure had improved dramatically, yet companies remained reluctant to commit to major new investments.
Investment was also concentrated in a relatively narrow group of sectors and business houses, including renewable energy, telecommunications, data centres and electronics assembly, while much of the broader corporate sector, particularly medium-sized manufacturers, remained cautious.
Subbarao attributed the hesitation partly to uncertainty about demand and expected returns and partly to regulatory friction, compliance burdens and unpredictable policy changes.
“Capital investment is a long-term bet on the future,” he said, adding that businesses would make such bets only when they had confidence in both future demand and regulatory stability.
Without a robust private investment cycle, sustaining growth above 7 per cent over the next decade would be difficult, he warned.
Growth must produce jobs
The second major concern is employment and productivity.
Subbarao said the real test of India’s economic model was not merely the headline GDP number but whether growth created productive employment for the country’s huge workforce.
Agriculture contributes only about 15 per cent of GDP but continues to employ nearly half the workforce. Manufacturing accounts for around 13 per cent of GDP and employs about 11 per cent of workers. In contrast, modern sectors such as information technology, finance and business services generate roughly 15 per cent of GDP while directly employing only about 3 per cent of the workforce.
India’s development path had therefore differed markedly from that of East Asian economies, where millions of workers moved from low-productivity agriculture into labour-intensive manufacturing.
While India had built globally competitive sectors such as IT and global capability centres and had made progress in electronics assembly, mass manufacturing had failed to expand at the scale required to absorb labour.
“Output is expanding, but the creation of formal high-quality jobs is not keeping pace,” Subbarao said.
Manufacturing, in his assessment, remained critical despite the rise of protectionism, automation and reshoring. With India importing more than $100 billion worth of goods annually from China, even partial import substitution could create substantial employment. Gains in global market share in labour-intensive exports could also generate jobs if Indian companies were able to expand and integrate with global value chains.
K-shaped growth constrains demand
Subbarao also drew attention to the increasingly fragmented nature of India’s consumer economy.
At one end, the formal urban economy was thriving, reflected in the growth of start-ups, buoyant financial markets, premium real estate and luxury consumption. At the other, real rural wages had remained weak and more than 85 per cent of the workforce continued to depend on informal employment without predictable incomes or adequate social protection.
He described this as a “K-shaped cleavage” between those benefiting substantially from economic growth and those experiencing much more limited gains.
The problem, he argued, was not merely one of inequality. It also affected the sustainability of economic growth.
Broad-based increases in household income were necessary to create mass consumption demand. If discretionary spending remained concentrated among a relatively small affluent section, the domestic market itself would be constrained, reducing the incentive for companies to undertake large-scale investments.
In that sense, inclusive growth and private investment were closely connected: stronger incomes across a wider population would generate demand, which in turn would encourage businesses to expand capacity.
Innovation deficit
Subbarao said these vulnerabilities pointed towards a deeper challenge as India sought eventually to move from middle-income to advanced-economy status.
At that stage of development, growth could no longer depend principally on cheap labour, favourable demographics or capital accumulation. It would increasingly have to come from innovation, productivity and investment in human capital.
India currently spends only around 0.7 per cent of GDP on research and development, compared with 3 per cent or more in several leading innovation economies.
Despite having a large pool of engineering talent and a strong software ecosystem, India remained more a user than a producer of frontier technologies and core intellectual property in areas such as semiconductors, artificial intelligence, biotechnology and advanced manufacturing, Subbarao said.
The challenge also had implications for India’s much-celebrated demographic advantage.
With a median age of about 28, India had entered a potentially favourable demographic window. But Subbarao cautioned that “a demographic dividend is not inevitable”.
It would have to be earned through education, skills and sufficient employment opportunities. Without them, a young population could become a demographic liability rather than an economic advantage.
Three priorities
Despite the concerns, Subbarao maintained that India remained exceptionally well positioned to benefit from the ongoing realignment of global manufacturing and supply chains.
The country’s improvements in macroeconomic management, infrastructure and digital systems represented important institutional gains.
But he said the real measure of success over the next decade would not simply be whether India could continue to record GDP growth of 6 or 7 per cent.
Instead, the test would be whether that growth translated into a self-sustaining private investment cycle, large-scale formal employment, stronger domestic technological capabilities and broad increases in household income.
He identified three priorities: creating a more predictable regulatory environment to revive private investment; accelerating the movement of workers from low-productivity agriculture into manufacturing and modern services; and directing greater fiscal resources towards education, health and research and development alongside physical infrastructure.
India had already demonstrated that rapid growth could coexist with macroeconomic stability, Subbarao said. The next challenge was considerably harder — ensuring that growth became deeper, more inclusive and increasingly driven by innovation.
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