By David Born

Amid a challenging global economy, India has emerged as a significant economic and geopolitical power in recent years. The Indian economy grew at 7% a year on average since opening its markets to international competition in 1991.

More recently, India overtook the United Kingdom to become the world’s fifth-largest economy, and it is expected to surpass Japan and Germany to become the world’s third-largest economy within the next few years.

In December 2023, Indian Prime Minister Modi announced the economic strategy of “Viksit Bharat 2047”, the term ‘Viksit Bharat’ meaning ‘Developed India’. Viksit Bharat 2047 represents the government’s vision to transform the country into a developed economy by the 100th anniversary of its independence in 2047. The vision comprises multiple aspects of development, including economic growth, social progress, environmental sustainability, and good governance. This ambitious pathway is as much a political and social aspiration as it is an economic mission.

Can India achieve its political and macroeconomic goals and realize its ambitions of “Viksit Bharat”? What are the key drivers of India’s growth trajectory in recent years? And what are the main constraints on this trajectory? These are the core analytical questions addressed in this edition of the Roland Berger Quarterly.

Economic foundations and key growth catalysts in India

India's economic development is one of the most remarkable transformations of modern times. Once an agrarian economy, with about half of its gross value added (GVA) coming from agriculture and allied sectors at the time of independence in 1947, the country has emerged as a global hub for services in the 21st century. The services sector, now accounting for roughly half of India’s gross value added (GVA), has been a key engine of growth. Industries such as information technology, financial services, and telecommunications have positioned India as a global leader in outsourcing and digital innovation.

Regarding India’s economic future, we see four key drivers as most relevant for India’s growth potential: India’s “demographic dividend”, urbanization trends and the corresponding expansion of the Indian middle class, and the Modi government’s huge investments in infrastructure.

India’s demographic profile represents a significant economic asset, often referred to as a “demographic dividend”. With a median age of about 28 years, the country has one of the youngest populations in the world. This demographic advantage provides India with a large working-age population that can contribute to sustained growth and development over the coming decades. However, translating this demographic advantage into economic gains will require substantial investments in human capital: education, skills training, and healthcare.

Urbanization is another key driver of India’s economic growth, with profound implications for its domestic market. As of 2023, approximately 35% of India’s population were residing in urban areas, and this figure is projected to rise to over 47% by 2050. This rapid urbanization is transforming India’s economic landscape by creating new hubs of economic activity. The agglomeration of industries in urban areas leads to economies of scale, greater innovation, and more efficient use of resources. These productivity gains contribute to overall economic growth, as urban economies tend to be more diverse and specialized than rural ones. As urban centers become innovation hubs, they not only contribute to India’s economic growth, but also position the country as a global leader in sectors such as information technology, biotechnology, and renewable energy.

Urbanization is also closely tied to the expansion of India’s middle class: As people migrate to cities, they typically experience higher wages, better access to education and healthcare, and an improved standard of living, which in turn increases their purchasing power. Thus, India’s middle class is expected to account for 46% of the population by 2030 and more than 60% by 2047. This growing middle class is a major driver of consumption across a wide range of sectors, including housing, retail, automobiles, and services such as healthcare and education. The growing demand for goods and services fosters new business opportunities, which in turn creates a cycle of economic growth. The growing urban middle class also creates new markets for innovative products and services, from tech gadgets to healthcare solutions.

Infrastructure development is another cornerstone of India’s growth strategy, playing a critical role in enhancing productivity, facilitating trade, and improving the quality of life for its citizens. As cities grow, they require significant investment in infrastructure to support their expanding populations and industries. This includes investments in transportation (roads, railways, metros), energy (power plants, renewable energy, grids), and public services (water, waste management, healthcare).

Recognizing its transformative potential, the Indian government has prioritized infrastructure investment through flagship programs such as the National Infrastructure Pipeline (NIP) or Gati Shakti, an infrastructure megaproject focusing on multi-model connectivity. These initiatives aim to modernize India’s transportation, energy, and urban infrastructure while encouraging private sector participation.

Obstacles and challenges for India’s economic future

In contrast to this bright potential of India’s economic future and its four key success factors, there are, however, several hurdles in India’s ambitious journey to become a developed nation. From economic challenges to social and structural barriers, these obstacles pose significant risks to achieving inclusive and sustainable growth.

India's labor market grapples with deep-rooted structural issues that impede effective labor force integration despite dynamic economic growth. Over the past two decades, the employment elasticity of growth — the responsiveness of employment to economic expansion — has averaged only 0.2 and is close to zero. In developing countries, however, it has averaged about 0.56. Thus, economists have referred to India's combination of GDP growth and stagnant employment growth as "jobless growth". Structural issues such as a weak manufacturing sector and restrictive regulations hinder job creation, while policies favor large corporations with subsidies and tax breaks. This leaves small businesses burdened by bureaucracy and taxation, exacerbating inequality. Moreover, growth is concentrated in a handful of regions, and limited investment in education and healthcare increases financial pressure on lower-income groups.

Amid India’s ongoing jobs crisis, the industrial sector has struggled to drive employment and growth, despite being one of the fastest growing major economies in recent years. Since 2012, the industrial sectors share of GDP has decreased from 29% to 25% in 2023, while the services sector has increased by 2 percentage points to 50%. A closer look at the industrial sector reveals that the manufacturing sector, which is usually a key driver of exports and economic growth, has struggled in particular. Manufacturing's share of GVA has fallen to just 12.8% in recent years, a steep decline from over 17% in 2010.

One of the most pressing issues is the lack of investment in manufacturing, especially in research and development (R&D). India invests less than 0.7% of its GDP in R&D, compared to China’s 2.4%. Also, investment in technological modernization remains subdued. This underinvestment in particular hinders the upgrading of machinery to increase productivity and global competitiveness. As a result, productivity remains low, even though it has increased by nearly 350% since 1995, when it stood at just USD 2 in GDP per hour worked (PPP). Today, India’s productivity is USD 9, well below China’s USD 18 and a staggering USD 87 in the United States. This productivity gap limits the sector’s ability to compete globally and stifles the growth of high-value manufacturing.

India’s manufacturing sector is hampered by a complex regulatory environment and weak integration into global value chains. Excessive bureaucratic red tape, frequent changes in tax policies, and inconsistent coordination between central and state governments create uncertainty for investors. Approval processes remain cumbersome, and wide regulatory disparities between states further discourage both domestic and foreign investment.

Conclusion

In the early 1990s, as China accelerated market reforms, it roughly followed the template of other economies in the region – Japan, South Korea, Taiwan – and became a champion of export-driven manufacturing. It built an economy that is now more than five times the size of India’s.

Western countries are now rushing to embrace India as an alternative to China. Indeed, as we have argued above, India has significant potential to become a global manufacturing hub: favorable demographics, a large and growing domestic market, and new public initiatives to promote industrial growth.

On the other hand, India’s complex and overly bureaucratic political system has three damaging consequences for the country’s industrial development. We call these obstacles the three L’s: In areas of law, land, and labor, India’s political system must become more flexible and effective.

Despite the significant challenges outlined in this Roland Berger Quarterly, we believe India is too attractive a market for international investors to dismiss – or simply overlook. Realizing business opportunities in India requires strategic workforce management, adaption to local markets, and a strong push for operational excellence.