State of India’s Economy 2025: Growth, Challenges and Outlook

• In 2025, the Indian economy navigated global slowdown, geopolitical shocks and financial volatility. These headwinds tempered the impact of domestic policy support and reforms.

Major Policy Actions in 2025

• GST Reform: GST 2.0 introduced a simplified two-slab structure of 5% and 18%, lowering rates on multiple goods, including cement, auto parts, and large appliances.
• Nuclear Reform: Parliament passed the SHANTI Bill 2025, allowing private participation in nuclear power to reach 100 GW of capacity by 2047.
• UK CETA: India signed the Comprehensive Economic and Trade Agreement (CETA) with the UK in 2025, granting duty-free access to 99% of Indian exports and easing professional mobility.
• Tax Changes: Budget 2025 increased the standard deduction and revised income tax brackets to boost Private Final Consumption Expenditure (PFCE).
• New Zealand FTA: The India-New Zealand Free Trade Agreement ensured zero-duty access for all Indian exports, particularly benefiting MSMEs and labour-intensive sectors.
• Labour Reforms: The Centre implemented four Labour Codes, mandating higher minimum wages and extending social security to over 15 million gig workers.

Economic Challenges Faced in 2025

• Tariff Shock: In August 2025, the United States imposed 50% tariffs on Indian exports, putting $87 billion in annual trade at risk.
• Oil Penalty: The US imposed an additional 25% tariff on Indian goods due to continued Russian oil imports, creating a 28-32% price disadvantage relative to China.
• FDI Outflows: Triggered by trade tensions, net foreign direct investment turned negative for three consecutive months, with $3.82 billion in outflows during August-October 2025.
• Currency Slide: The Indian Rupee depreciated to a historic low of ₹88.78 per US dollar, raising concerns about imported inflation and higher debt-servicing costs.
• Trade Gap: Merchandise trade deficit widened to $223 billion during April-November 2025 due to elevated energy prices and a global reorientation of supply chains.
• Margin Stress: Increased freight costs and tariff barriers led to a projected 10-18% compression in EBITDA across manufacturing sectors with high exposure to the US market.

Structural Takeaways From 2025

• Policy Mix: India’s 2025 experience highlights a dual-track strategy: domestic demand stimulation alongside external trade diversification.
• Vulnerability Exposure: Continued dependence on a few large export markets exposes India to geopolitical and protectionist shocks.
• Reform Continuity: Labour reforms, tax rationalisation, and trade engagement signal reform continuity, but outcomes depend on global conditions and execution capacity.

Economic Outlook for 2026

• RBI Projections: GDP growth for 2025-26 is projected at 7.3%.
• Implication: Slower growth in the second half, First half growth averaged ~8%.
• Base Revision: MoSPI is set to release a new CPI series (Base 2024 =100) and revised GDP–IIP data (Base 2022-23) to reflect the digital economy better.
• Export Mission: The government is planning an Export Promotion Mission to provide cheaper credit and non-tariff support for exporters targeting the EU and African markets.
• EU FTA: India-EU Free Trade Agreement negotiations are nearing completion and are expected to unlock a 450-million-consumer market for Indian services.
• Policy Shift: With the repo rate at 5.25%, the RBI is expected to shift from aggressive rate cuts to liquidity management to support growth.
• Market Diversification: India is actively pursuing Mission 500 to raise bilateral trade with the US to $500 billion by 2030 while expanding ties with the MERCOSUR and GCC blocs.
• Demand Revival: GST rate cuts are expected to take effect in 2026, leading to a significant rise in rural demand as essential goods become 7-13% cheaper.

India’s Strategic Economic Push Ahead

• Base Revision: MoSPI is set to release a new CPI series (Base 2024 =100) and revised GDP–IIP data (Base 2022-23) to reflect the digital economy better.
• Export Mission: The government is planning an Export Promotion Mission to provide cheaper credit and non-tariff support for exporters targeting the EU and African markets.
• EU FTA: India-EU Free Trade Agreement negotiations are nearing completion and are expected to unlock a 450-million-consumer market for Indian services.
• Policy Shift: With the repo rate at 5.25%, the RBI is expected to shift from aggressive rate cuts to liquidity management to support growth.
• Market Diversification: India is actively pursuing Mission 500 to raise bilateral trade with the US to $500 billion by 2030 while expanding ties with the MERCOSUR and GCC blocs.
• Demand Revival: GST rate cuts are expected to take effect in 2026, leading to a significant rise in rural demand as essential goods become 7-13% cheaper.

India’s economic resilience in 2025 highlights the power of reforms, exports, and investment-led growth. As Raghuram Rajan notes, “Sound policies today shape prosperity tomorrow,” ensuring inclusive and sustainable development.

Reference: The Hindu

PMF IAS Pathfinder for Mains – Question 482

Q. While India remains the fastest-growing major economy in 2025, concerns regarding export performance, private investment and job creation persist. Examine the key challenges shaping India’s growth outlook and propose a reform-oriented policy response. (150 Words) (10 Marks)

Approach

• Introduction: Write a brief introduction about the current state of the Indian economy.
• Body: Write key challenges despite being the fastest-growing major economy in 2025, and propose a reform-focused policy response.
• Conclusion: Emphasis on sustainable growth and future plans.