Amidst the upbeat mood swirling around the recent GST rejig involving slab-wise recategorisation of goods, much of the mainstream media headlines last week marked a temporal moment of celebration around India’s growth numbers, especially in response to US President Donald Trump calling India a “dead economy”.India’s GDP from the recent growth numbers grew 7.8% in the first quarter of the current financial year (FY 2025-26), a five-quarter high that confirmed the country’s position as the fastest-growing major economy in relative comparison to other nations which are currently witnessing a recessionary phase amid uncertainty and a weak growth macro-outlook.However, beneath the surface, India’s own economy today embodies a major structural paradox despite the 7.8% first-quarter growth: it often projects a short-term growth sprint that masks deeper structural fragilities which miss the attention of headline-managers in news studios.The current Indian growth story, in its structural composition, is being driven less by organic private dynamism and more by precarious fiscal spending coming from the government’s major infra-and public investment push. The industrial revival remains narrow and the labour market wallows in a deeper crisis – as it has stayed for eight to nine years now.This is not a theoretical risk but an existential danger. With the Labour Force Participation Rate (LFPR) hovering at an alarmingly low 54.2% and the female LFPR languishing at a mere 30.2%, the numbers signal a demographic dividend in peril.Compounding these stress-points are severe external vulnerabilities, most notably a punitive 50% US tariff shock and the sustained foreign capital flight. India’s trajectory resembles a runner surging ahead while carrying an unacknowledged burden that threatens to sap their stamina before the finish line.This disquieting reality becomes clearer when the 7.8% growth figure is disaggregated. The expansion was propelled primarily by a 7.8% year-on-year surge in public capex (capital expenditure), creating a powerful fiscal impulse.However, the reliance on Keynesian pump-priming is a double-edged sword, risking the creation of unproductive assets and proving unsustainable against the backdrop of a fiscal deficit that already strains public finances.It masks a persistently negative output gap, suggesting the economy is still performing well below its potential because of the private sector slack. The most alarming signal comes from Private Final Consumption Expenditure (PFCE), the bedrock of the economy, which decelerated to 7%, down from 8.3% a year ago.Also read: The GST Rate Cuts Will Not Achieve Their GoalWhile PFCE still accounts for 60.3% of the GDP, its weakening momentum is a textbook symptom of a K-shaped recovery. This bifurcation, an oft-made remark on India’s development trajectory in a post-Covid economy, is further mirrored in the financial markets, where equity indices soar to record highs, creating a dangerous disconnect from the on-ground reality of anaemic corporate earnings and stressed household balance sheets.The strain on households is immense. Financial savings as a share of GDP fell to 5.1% in 2023-24, the lowest in over a decade, as families drew down savings to sustain consumption. Such dis-savings are not sustainable and foreshadow future demand compression. Persistent inflation has worsened the problem.This explains why rural discretionary consumption — on items like two-wheelers and consumer durables — remains sluggish.Contrast this with the luxury car segment, where sales grew over 20% year-on-year, a stark indicator of deepening inequality, which is further corroborated by the Gini coefficient hovering at historically high levels.On the supply side, the recovery is dangerously skewed. The Index of Industrial Production (IIP) rose to 5% in January , but this was marred by the mining sector (-7.2%), which continued to contract in July 2025.Critically, capacity utilisation in manufacturing remains below 75%, far from the 80-85% threshold that typically triggers a private capex cycle. The celebrated uptick in electronics exports conceals the fact that India’s value-added share in this sector is less than 20%, with most operations confined to final assembly.Without backward integration, this is unlikely to catalyse skill upgrading or technological deepening. The hollowness is now exposed by external shocks. The US tariffs announced in August 2025 cover sectors worth $86 billion in annual exports.With two-thirds of these exports likely to be hit, the net export loss would be $25 billion-$30 billion, translating to a GDP drag of 60-80 basis points annually. Ultimately, India’s growth spurt looks less like an industrial renaissance and more like a fragile, state-funded expansion with a hollow core — a fiscal illusion rather than a structural transformation.Deep-seated cracks and policy contradictionsThe quarterly surge rests atop chronic structural weaknesses that threaten long-term stability. The labour market is the clearest fault line. Labour Force Participation fell to 54.2% in June 2025, with the female LFPR languishing at just 30.2% (33.6% in rural areas, 22.9% in urban areas). By contrast, male LFPR stood at 78.1% for rural areas and 75% for urban areas.The Worker Population Ratio declined to 51.2%, and official unemployment was 5.6%, even as urban youth joblessness soared to 18.8% in May. Put differently, nearly one in five educated young urban Indians is unemployed, a textbook case of “jobless growth”.This is not merely a cyclical issue. India risks hysteresis, where temporary downturns lead to permanent detachment from the workforce and erosion of skills.Agriculture still employs over 42% of the workforce but contributes barely 18% to the GDP, clear evidence of disguised unemployment. The productivity differential between agriculture and modern industry is widening, yet the shift of labour across sectors remains stalled. Without labour-intensive industrialisation, the demographic dividend could flip into a demographic liability.External vulnerabilities deepen the picture. The current account deficit widened to 0.2% of the GDP in the first quarter of FY 2025-26, driven by weaker exports and higher energy imports.Foreign portfolio investors (FPIs) withdrew nearly Rs17,700 crore from equities in July 2025, reflecting a global risk-off cycle as US bond yields hardened. India’s forex reserves, though still above $600 billion, have been drawn down by approx declined by $2.07 billion since April. This echoes a classic “twin deficit problem”: a fiscal deficit near 5.6% of the GDP and a widening current account deficit, both making India dependent on volatile capital inflows.The Reserve Bank of India (RBI) is caught in a policy trilemma: defending the rupee, anchoring inflation and supporting growth. If the RBI raises policy rates to curb imported inflation and defend the currency, it risks choking the fragile recovery. If it stays accommodative, it risks fuelling asset bubbles and worsening capital flight. The rupee, down approximately 3% against the dollar in 2025, illustrates this bind.Financial markets themselves reveal the disconnect. The Nifty-50’s forward price-earnings ratio trades at 23.3, far above the EM average of 12-13. Yet, corporate profit growth in Q1 FY26 was just approximately 3% year-on-year. This suggests that equity markets are levitating on liquidity and sentiment, not fundamentals. A “Minsky Moment”, a sudden collapse in asset prices after a speculative build-up, looms as a risk.Banking fragility persists. Despite non-performing assets (NPAs) declining to approximately 3 per cent of advances, risk aversion remains high, with MSME credit growing by 14.1% far below overall bank credit growth of 12%. This is alarming because MSMEs contribute almost 46 per cent of India’s exports and are precisely the sectors most exposed to tariff shocks. Credit rationing here worsens employment losses and amplifies distress.Also read: GDP Growth Estimates: Something Does Not Add UpPolicy contradictions further compound these vulnerabilities. The Production Linked Incentive (PLI) scheme has created short-term gains in sectors like electronics and pharmaceuticals but has not incentivised innovation.India’s Gross Expenditure on Research and Development (GERD) remains stuck at approximately 0.6-0.7% of the GDP, compared to 2.6% in China, 3.4% in the US, and 5.2% in South Korea. In absolute terms, GERD rose from Rs 6.02 lakh crore in 2010-11 to approximately Rs 12.74 lakh crore in 2020-21 but the ratio to GDP stagnated. The result is predictable: India remains at the assembly stage of global value chains, unable to design or innovate at scale.Meanwhile, tax policy risks undercutting competitiveness. The proposed GST 2.0 reform, while aiming for simplification, risks worsening inverted duty structures that penalise domestic value addition. This fiscal stress narrows policy space and raises reliance on volatile borrowing.A blueprint for inclusive prosperityAn indirect tax rationalisation like that of GST, as useful as it may be, may not mend structural dysfunctionings for an economy that remains deeply disjointed at this point and is divided (and unequal) for its own people in terms of access to opportunities and in distribution of outcomes.To transcend this structural paradox, amidst a heightened concern of unpredictability in international trade scenarios, India’s domestic economic policy framework must pivot from short-term macroeconomic management to structural transformation.In the immediate term, managing external shocks requires building forex reserves through diversified export markets, non-disruptive capital flow management and prudential foreign debt policies. A credible medium-term fiscal consolidation roadmap, targeting a fiscal deficit below 4.5% in FY 2025-26, would anchor investor confidence.On the domestic front, factor market reforms in a consensus- based manner are unavoidable. Labour reforms require genuine implementation of the four labour codes, balancing flexibility with worker protections.Land reforms still remain a key bottleneck: acquisition disputes delay infrastructure projects by years, raising costs. Transparent, market-linked compensation mechanisms are essential.A decisive reform agenda may also tackle State-owned enterprises. Many operate inefficiently in non-strategic sectors, dragging productivity. Strategic disinvestment is not just revenue mobilisation but a structural efficiency reform. India’s privatisation pipeline has consistently underperformed; a credible, time-bound roadmap is overdue.Equally critical is innovation and human capital development. Without boosting R&D spending to at least 1.5% of the GDP over the next five years, India will remain locked in low-value production. Public funding alone cannot bridge this; incentives for private sector R&D, university-industry collaboration and intellectual property enforcement are key. Without this, India risks permanent technological dependency.The informal sector represents the largest untapped potential. It still contributes over 50% of the GDP and employs approximately 90% of workers but lacks access to credit, social security or scale. Formalisation is the key to unlocking productivity. Yet, GST compliance burdens, limited credit penetration and weak enforcement have hindered progress.A comprehensive strategy, simplified compliance, digital credit infrastructure and targeted incentives for registration could accelerate formalisation. This would also expand India’s perilously narrow tax base, which currently covers less than 7% of the working population.Finally, India must embrace export diversification. The over-reliance on the US and low-value exports makes the economy highly vulnerable to shocks.Moving up the global value chains in electronics, green technologies and pharmaceuticals requires not just subsidies but ecosystem reforms: reliable power, logistics efficiency and skill deepening. Without these, India risks missing the window as global supply chains reconfigure in a de-globalising world.India today stands at an inflection point. The 7.8% quarterly growth masks a deeper fragility. Public spending props up the economy, while private demand stalls. Industrial revival is narrow, labour force participation is falling and external shocks are biting hard. Equity markets thrive on sentiment, not fundamentals. Fiscal illusions can sustain headlines, but they cannot deliver resilience.If India is to sustain its rise to global economic leadership in a tough phase for the geoeconomic order, it cannot rely on fiscal adrenaline and celebratory numbers.The future lies in second-generation reforms that expand the economy’s true productive capacity. This means raising labour force participation, catalysing private investment and fostering innovation to climb global value chains. Only then will India’s growth be resilient, inclusive and sustainable, a transformation where the headlines finally match the lived reality of its citizens.With contributions and research inputs from Ankur Singh, Research Analyst, CNES.