* Soaring quarterly growth data cements India’s position as the fastest-growing major economy over the past decade
* Growth driven by robust domestic demand, tax cuts, easy monetary policy and structural reforms
* Labour law changes, Good and Services Tax simplification set stage for sustained growth
* Flurry of growth updates for 2026 despite headwinds on trade front with the US, oil imports from Russia
India’s rapid economic expansion continues unabated, driven by strong domestic demand, tax cuts, a supportive monetary policy and the impetus provided by reforms.
The publication of the latest quarterly government data1 has further cemented India’s place as the fastest growing major economy over the past decade. The robust 8.2% expansion in the three months to September, the fastest pace in six quarters, surprised many as it exceeded the estimates of most analysts and economists.
However, for those of us who closely watch earnings and profitability of companies, this was no surprise. Low inflation is an important factor to bear in mind when analysing the year-on-year growth in corporate earnings. While the nominal earnings growth numbers (around 10% for large caps excluding the outliers) are lower than one might normally expect, it is good in real terms because inflation has been about five percentage points below usual levels.
Following the release of GDP data, the Reserve Bank of India reduced its policy rate by 25 basis points and signalled that it has room for further reductions, defying predictions that soaring growth and a weakening rupee might deter further cuts. This was possible mainly because inflation is now lingering near zero, in stark contrast to many developed economies struggling to keep it below their 2% targets.
In total, the Reserve Bank of India has cut policy rates by 125 basis points in 2025, the most aggressive easing since 2019, helped by inflation now well below the central bank’s 2% to 6% target band.
In a sweet spot
The economy is in a sweet spot and is well placed to capitalise further on the growth momentum.
Prime Minister Narendra Modi, who’s been at the helm since 2014, aspires to make the Indian economy a high-income, developed nation by 2047. The World Bank, in a report earlier this year, said the economy will need to grow at 7.8% on average over the next 22 years to achieve that status. The recent landslide victory of Modi’s party and its alliance partners in the Bihar state elections is a shot in the arm for the prime minister and his push for reforms, even though the win doesn’t have a direct bearing on the functioning of the federal government.
A flurry of upgrades to growth in 2026 has followed, despite some headwinds such as the delay in finalising a trade deal with the US and lingering questions over energy imports from Russia. On its part, the RBI raised its forecast for the current year to 7.3% from 6.8%. Fitch Ratings boosted its estimate to 7.4% from 6.9% while the State Bank of India expects 7.6%.
Some moves on the tax front have also underpinned growth. In February, India cut personal income tax for some individuals to spur spending and followed it up with a simplification of Goods and Services Tax (GST), which has underpinned consumer spending. Under the GST move that took effect in September, most goods are now being taxed either at 5% or 18%, compared to the earlier rates of 5%, 12%, 18% and 28%. This is already having a meaningful impact on consumption, particularly automobile sales. In fact, the introduction of GST during Modi’s first term put an end to years of wrangling among states and has boosted tax revenues.
Pro-business reforms
Sweeping changes to India’s labour laws, effected recently, could provide further impetus to growth. Among the reforms were raising the threshold for hiring and firing workers, relocate or shutdown any entity without prior government approval. The threshold was 100 employees earlier and has now been raised to 300 . Restrictions on where and when women can work have been removed, potentially enabling higher female participation in the labour force, which is currently far below the global average. The reforms also include initiatives to expand welfare coverage gig workers.
The number of rules governing employment has been reduced to 350 from 1,400, significantly cutting red tape, and making it easier to do business. Further reforms are expected in areas such as electricity distribution and, potentially, the consolidation of the state-controlled banks. The cumulative effect of these reforms should be to improve efficiency and, ultimately, to support higher GDP growth.
Even though India has faced some headwinds to exports, particularly to the US, the country is more domestically driven compared to some East Asian economies. Total trade as a percentage of GDP is just less than 50%. In addition, goods exports to the US account for only 2% of India’s GDP, and several large sectors such as generic pharma and electronics are exempt from tariffs. If a deal materialises in the next month or two – and recent comments from both US and Indian trade officials suggest movement in this direction – it could be a positive catalyst for markets, as foreign inflows would likely resume in greater volume.
India is quite different from other EM countries such as China and South Korea, which heavily rely on manufacturing exports and high-tech industries. The South Asian nation has a large services sector and limited dependence on exports to drive growth, which makes it less vulnerable to rising geopolitical risks and trade tensions.
Overall, the Indian stock market provides a rich hunting ground for investors as it offers a choice from more than 4,800 listed companies, out of which about 600 companies have market capitalisations exceeding $1 billion. We follow a consistent and patient “growth at a reasonable price” approach by striving to identify companies that can potentially generate higher returns at lower valuation than their peers. With the country strengthening on multiple fronts, that could potentially augur well for our strategy.
Footnotes
1. According to data released on Nov. 25 by India’s Ministry of Statistics and Programme Implementation .
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