Sajjid Chinoy writes: Economy has weathered West Asia shock. Now, reform for sustained growth

The Indian economy has shown resilience in the face of the West Asia conflict, with GDP growth for the last quarter expected to reach 8 percent. This growth defies expectations of a negative impact from the geopolitical tensions. Key factors driving this recovery include a joint fiscal-monetary-regulatory stimulus implemented in 2025, which included tax cuts, GST rationalization, and interest rate reductions.

Additionally, non-oil exports have shown acceleration, driven by a 15 percent depreciation of the real effective exchange rate since 2025, reduced US tariffs, and resilient global growth. India's swift and adaptive policy response to the conflict, including diversification of energy imports and absorption of the oil price shock, has helped insulate the private sector from domestic shortages.

However, the recent growth spur is largely cyclical, fueled by tax and interest rate cuts, and corporate capex remains subdued, hovering around 10-11 percent of GDP. To achieve sustained growth, there is an urgent need for corporate capex to expand, which requires stronger demand visibility, particularly in consumption and exports.

While recent consumption growth has been modest at around 5 percent post-pandemic, rising credit availability has supported consumption. Yet, this may not be sustainable, and a shift towards more structural demand is crucial, especially considering the high capital-labour ratio in India and the need to make labor more attractive compared to capital.

Addressing this will require improvements in education, skilling, health, labor laws, and rationalization of non-tariff barriers to boost exports.