India’s Goldilocks Gamble

The economy’s rare mix of growth, low inflation and big spending must give way to innovation or risk stalling.

The Indian economy’s performance in 2025 confounded sceptics. Even as tariff threats from the United States loomed and global trade grew choppier, domestic consumption proved sturdy enough to carry growth beyond expectations. Inflation collapsed with startling speed as consumer prices slid from 4.26 percent in January to a record-low 0.25 percent in October, while wholesale prices turned negative at minus 0.32 percent in November. Input costs eased, margins fattened and the Reserve Bank of India (RBI) found itself presiding over a rare ‘Goldilocks’ moment with strong growth and controlled inflation.

Low inflation buttressed purchasing power, encouraged borrowing and allowed credit to flow freely into the economy. It also gave policymakers the confidence to persist with a strategy they have increasingly embraced over the past four years: by using capital expenditure as the principal lever of growth.

Consumer Surplus

Domestic demand does not rise by accident. It depends on a healthy consumer surplus which is the gap between what people are willing to pay and what they actually do. That, in turn, relies on more than shiny products or clever marketing. Roads, railways, power grids and urban infrastructure all determine whether demand can be sustained. At the heart of India’s recent expansion lies a determined push to rebuild this ecosystem through capital spending.

The numbers tell the story. National capital investment, including state spending, has risen from 1.7 percent of GDP in 2013–14 to 3.2 percent in 2024–25, with effective capital expenditure touching 4.1 percent of GDP. Utilisation has also improved. In the first half of 2025–26, government capex usage reached 51.8 percent, up sharply from 37.3 percent a year earlier, signalling an effort to front-load projects and keep construction humming. A larger share of national income is now being ploughed back into productive assets.

Central government spending has led the charge. Capital outlay climbed from Rs. 5.54 trillion in 2022–23 to Rs. 9.5 trillion in 2023–24, with targets of Rs. 10.18 trillion for 2024–25 and Rs.11.21 trillion budgeted for 2025–26. By November 2025, nearly 58.7 percent of the latest allocation had already been spent, suggesting that the pace may moderate later in the year. More than half of this outlay went to roads and railways, underscoring the state’s enduring faith in concrete and steel as engines of growth.

Three ministries dominated the splurge. Road transport remained the most prolific spender, railways followed close behind and defence also stepped up. By December 2025, railways had exhausted about 80 percent of their capital budget, while defence had used roughly 76 percent. The quality of this expenditure mattered as much as its scale. Capital spending grew by 10.1 percent in 2025, comfortably outpacing revenue expenditure at 6.7 percent, signalling a preference for asset creation over consumption. Combined with credible fiscal management, this helped keep borrowing costs contained and investor confidence intact.

States, long responsible for much of India’s infrastructure, were coaxed into spending more through a mix of incentives and competition. The centre’s flagship Scheme for Special Assistance to States for Capital Investment offers 50-year interest-free loans, often tied to reforms in electricity distribution or urban governance. In the 2025–26 budget, Rs. 1.5 lakh crore was allocated to the scheme, taking total sanctions since inception to over Rs. 3.6 lakh crore. The result was striking: 22 states recorded growth of more than 10 percent in their own capital spending. New initiatives like the Urban Challenge Fund, relaxed borrowing limits for power-sector reforms and an Investment Friendliness Index further stoked this race to build.

Private Capital

Public investment, however, can only carry an economy so far. Private capital must eventually take the baton. Here the picture in 2025 was mixed. Spending hit a record ₹6.56 trillion in 2024–25 but is projected to fall by about 25 percent in 2025–26 as firms turn cautious amid global uncertainty, high interest rates and the end of earlier capacity cycles. Yet the quality of investment remained encouraging. Manufacturing accounted for more than 65 percent of gross fixed assets, over half of it in machinery and equipment. Firms cited income generation and technological upgrading as their chief motives, with renewables, information technology and transport drawing particular interest. India’s growing network of global capability centres has become a quiet pillar of high-value services and innovation.

If India’s ambition is to become a developed nation by 2047, however, concrete and machinery will not suffice. The next leap must come from ideas. Here lies the economy’s most stubborn weakness. Research and development spending has languished at just 0.6 to 0.7 percent of GDP for nearly two decades. In absolute terms it has grown eightfold to around Rs. 2 lakh crore, but this pales beside the effort of richer peers. South Korea spends over 5 percent of GDP on R&D, the United States nearly 3.6 percent and China about 2.6 percent, mostly driven by private firms. In India, innovation remains heavily dependent on the state, with the centre and states together funding over half of all R&D.

The cost of this imbalance is high. Evidence suggests that a one-percentage-point rise in R&D spending can lift per capita income by 0.13 percent, while artificial intelligence alone could close up to 35 percent of the productivity gap needed for sustained 8 percent growth. Recognising this, the government has begun to pivot. The Anusandhan National Research Foundation aims to mobilise Rs. 50,000 crore by 2028, drawing in industry and philanthropy. A new Rs. 1 lakh crore RDI scheme offers long-term, low-interest loans for high-risk projects in deep technology, energy security and climate solutions.

Asset monetisation provides another piece of the puzzle. India’s first National Monetisation Pipeline has already unlocked Rs. 5.6 lakh crore (94 percent of its target). The next phase aims for Rs. 10 lakh crore over five years. If executed well, this virtuous cycle could help push debt towards 50 percent of GDP by 2031 without throttling growth.

India’s 2025 performance showed what disciplined macroeconomics and determined public investment can achieve. The harder task now is to convert this momentum into a durable, innovation-driven expansion. Roads and railways have laid the groundwork. Whether India reaches its 2047 destination will depend on what it builds next in laboratories, factories and minds.

(The author is a Chartered Accountant with a leading company in Mumbai. Views personal.)