By Santosh Kumar Mohapatra
India’s aspiration to emerge as a developed economy remains more rhetorical than real. Although the country moved from low-income to lower-middle-income status in 2007, it has remained trapped in this category for nearly two decades. Despite sustained headline growth, India’s per capita income—hovering between $2,400 and $2,700 in recent years— remains far below the threshold for upper-middle-income status ($4,466–13,845) and even further from high-income classification (above $13,845). This prolonged stagnation reflects deep-rooted structural weaknesses rather than a temporary slowdown. As repeatedly emphasised by the World Bank, countries that fail to transition from investment- or consumption-led growth to innovation- and productivity-driven development risk falling into the middle-income trap. India exhibits many of these warning signs: jobless growth, weak manufacturing performance, stagnant real wages, skill mismatches, low innovation intensity, and widening inequality. The failure of manufacturing is particularly consequential.
Historically, manufacturing has been the engine of productivity growth and large-scale employment in successful late-industrialising economies. In India, however, the absence of high-value manufacturing, limited technological upgrading, and weak integration into global value chains have constrained the creation of quality jobs. External sector developments raise further concerns. While gross foreign direct investment inflows remained strong, reaching about $81 billion in FY25, net FDI collapsed dramatically. Net inflows fell by nearly 96% in FY25 to around $0.4 billion, primarily due to higher profit repatriation by foreign firms and a sharp surge in outward investment by Indian companies. Financial markets reflect similar stress.
Foreign Portfolio Investors recorded unprecedented equity outflows in 2025, amounting to about Rs 1.58 lakh crore—the highest annual outflow on record. This trend persisted into early 2026. Although domestic institutional investors partially offset these withdrawals, foreign investor confidence remained fragile. Currency markets mirrored these pressures. The rupee, which averaged around 85.80 per US dollar at the beginning of 2025, crossed the psychologically significant 90-mark in December 2025 for the first time.
Over the year, the rupee depreciated by nearly 6%, making it among the worst-performing currencies in Asia. Household finances represent another critical vulnerability. Indian households are increasingly relying on borrowing to sustain consumption, signalling a shift away from traditional saving behaviour. RBI data show that between 2019 and 2025, household liabilities increased by 102%, while assets rose by only 48%. Household debt climbed to 41.3% of GDP, well above its five-year average of 38.3%, with consumption-related loans accounting for the bulk of this increase. Net household financial savings declined from 11.5% of GDP in FY21 to 5.1% in FY23. Of particular concern is the growing divergence between rapid bank credit expansion and much slower deposit growth, even as private investment remains subdued.
Fiscal indicators further compound these challenges. Despite claims of robust economic growth, tax revenues have failed to rise proportionately. The central tax-to-GDP ratio (before devolution to states) declined from 11.7% in FY24 to 11.5% in FY25 and is projected to fall further to 10.8% in FY26, even after substantial dividend transfers from RBI. This highlights a fundamental weakness: economic growth is not translating into enhanced fiscal capacity, which is essential for sustainable development. Central government debt is estimated at 56.1% of GDP in FY26, far exceeding the 40% target envisaged un der FRBM framework.
Although India continues to project itself as the fastest-growing major economy, this growth has not translated into improvements in human well-being. Gains remain disproportionately concentrated among higher-income groups, leading to rising inequality. Escaping this development impasse requires a decisive shift towards innovation-led and productivity-driven growth, a stronger and more technologically advanced manufacturing base, improved governance, and sustained public investment in education, health, and social security. Without such a transformation, India’s ambition of becoming a developed economy will continue to remain elusive.
The writer is an Odisha-based economist & columnist.