India’s Path To Becoming One of the World’s Largest Economies

The Issue:

India has sustained an average economic growth rate of above 6 percent for the past three decades, with an even stronger post-pandemic rebound – over 8 percent annually during 2021-2024. This fast pace of expansion has not only lifted millions out of poverty and raised household incomes, but also elevated India’s role as a major player in the global economy and key contributor to global growth. India’s development path has involved making a direct transition from an agrarian to a service economy, differing markedly from most Western and East Asian countries (and notably China) that have relied on expanding industrial sectors drawing labor from agriculture before transitioning to a larger service sector. The Indian government has set a goal to transform the nation to a developed economy (Viksit Bharat) by the centenary of its independence in 2047. The question is how the country can buttress its growth trajectory in a shock-prone and increasingly fragmented world. In this context, India’s experience may offer valuable insights for other emerging markets navigating similar transitions.

India’s trajectory from agriculture straight to services has meant that it largely bypassed stages of industrialization typical of other emerging markets.

The Facts:

• India is now the fastest growing major economy in the world, with a high and rising contribution to global growth. In Purchasing Power Parity (PPP) terms (that is after adjusting for differences in price levels and the cost of living across countries), India accounted for about 8.3 percent of global GDP in 2024 — up from less than 3.5 percent in 1990. It is now the world’s fourth-largest economy — behind only China, the United States, and the European Union. In 2024, India contributed close to 17 percent to global GDP growth, and IMF projections suggest that this contribution will rise to almost 20 percent over the next five years (see chart). This sustained growth has translated into broad income gains and a significant reduction in poverty. According to the World Bank, GDP per capita (PPP) has risen about tenfold over the past three decades, while the rate of extreme poverty (income of $3/day or under) has fallen to about 5 percent in 2022, down from over 45 percent in the early 1990s. 
• India’s economic journey has been unique, shifting directly from an agricultural base to a service-led structure. Agriculture’s share of value added declined from about 30 percent in 1990 to 20 percent in 2024. At the same time, the share of value added in the services sector grew from just over 30 percent of value added to over 55 percent, led by rapid expansions in fields such as information technology, finance, and travel. This transition has benefitted from advances in digital technology and India’s widening base of educated middle classes, which have allowed India to become a leading force in business service digital out-sourcing. India’s trajectory moving from agriculture straight to services has meant that India largely bypassed stages of industrialization that have been typical for the development of emerging market economies such as Brazil or China. 
• Increases in the country’s capital stock and improvements in productivity have been key drivers for growth, bolstered by landmark reforms. GDP growth in India has shifted away from a labor-driven model in the 1980s to being increasingly driven by physical capital and increases in the efficiency of resource use since the 1990s (see here and here). The shift has been linked to several instrumental reforms since the 1990s. Specifically, the 1991 liberalization deregulated the economy, opened it to foreign trade and investment, and laid the foundation for private sector–led growth. More recent reforms have built on this momentum — for example, introducing the Goods and Services Tax (GST) has helped unify the domestic market while investing in digital public infrastructure has enhanced financial inclusion and service delivery. Together, these reforms have improved resource allocation, boosted productivity, and strengthened the overall business climate, catalyzing India’s transformation into a fast-growing economy.
• A prudent macroeconomic policy framework has underpinned India’s sustained growth. The adoption of a flexible inflation target regime for monetary policy in 2016 has helped anchor inflation expectations amid food price volatility. Post-pandemic fiscal deficits have remained within targets, helping to build policy credibility. Fiscal policy has achieved consolidation amid a strong push in growth-enhancing public investment. Financial sector reforms –-focusing on improving the resilience of banks and non-bank financial companies, deepening financial markets, and strengthening regulatory oversight — have enhanced financial stability, as evidenced by improved bank capital, declining non-performing loans, and rising profits. 
• Achieving India’s aspirations of reaching high-income status by 2047 will require sustaining strong growth over the next two decades — an increasingly challenging goal in the current global environment. India would need to grow at about 8 percent annually over the coming decades to meet this target, a tall order given historical growth of 6.1 percent on average over 1991-2024. Meanwhile, elevated global trade policy uncertainty, rising protectionism, and geopolitical tensions pose external headwinds. Another major question will be how India will handle advances in Artificial Intelligence (AI). IMF research estimates that 26 percent of Indians are in occupations with high AI exposure — 14 percent in jobs where AI may turn out to be largely complementary, potentially raising productivity and earnings, but 12 percent in occupations that are at a higher risk of being displaced. 
• A major continuing constraint on growth, despite successful past economic reforms, is that India’s private capital stock remains low compared with what is needed to meet India’s developmental aspirations, partly reflecting remaining structural impediments to business activity. While public investment has played a prominent role in the post-pandemic recovery, it needs to be reinforced by a durable revival in private investment to raise India’s productive capacity and productivity. Although private investment in India is relatively high by emerging market standards, India’s capital stock remains at only about one third of the level in other EMs when compared on a per-capita basis. Further scaling up private investment is essential to build the capital stock required for India's transition to a developed economy. The improved health of corporate and financial sector balance sheets provides a supportive backdrop, but there is still limited evidence of widespread capacity constraints that would lead to a marked investment push. In addition, global economic policy uncertainty and structural bottlenecks can weigh on investor sentiment and constrain investment, including foreign direct investment. Cross-country evidence underscores that India still has room to catch up with best-performing emerging market and global reform benchmarks, including in judicial efficiency, credit market access, and trade openness.
• With India’s relatively young population, labor’s contribution to growth has been rising. But a significant portion of India’s labor force remains underutilized, and the favorable demographic window is gradually narrowing. While labor has historically played a relatively limited role in driving India’s growth, its contribution increased significantly during the post-pandemic period, supported by rising labor force participation and employment. This shift highlights the potential of India’s demographic dividend, defined as the growth benefits from an increasing working age population. India’s working age population is projected to continue to increase in the next decade, in contrast to other countries like China that will experience a rising demographic drag as their populations age. However, the growth benefits from India’s rising youthful working-age population could be eroded by the high portion of the Indian workforce still employed in relatively low-productivity and informal sectors. A further constraint is that, despite notable gains in recent years, female labor force participation remains relatively low. Without a substantial expansion in high-quality and formal-sector jobs, the full benefits of the demographic opportunity may go unrealized. Moreover, the window to reap the demographic dividend is narrowing as the share of working-age population is projected to start declining gradually after 2034. 
• Notwithstanding recent success in business service exports, India remains a relatively closed economy that does not take full advantage of potential international trade and investment opportunities. While, recently, efforts have been made to simplify and reduce tariff rates, India’s average tariff levels remain high compared to peer emerging markets. On the investment front, while FDI flows have declined broadly around the world in recent years, the decline has been more pronounced for India, whose share in global FDI has declined to about 2 percent in 2023, from about 2½ percent during 2014-19.