Indian Economy in 2025

Introduction

The Indian economy in 2025 has been a mixed bag, challenging both optimists and pessimists. Despite expectations of a resilience against President Donald Trump's tariffs and a potential US trade deal, India faced the highest effective tariffs into the US, surpassing even China.

Trade and Tariffs

• India faced a 50% American tariff barrier following the Trump administration's reciprocal tariffs and additional penalties for Russian crude purchases.
• Despite these challenges, Indian exports to the US saw an uptick due to buoyant exports of pharmaceuticals and electronics and successful market diversification.

Domestic Economic Performance

• India experienced steady growth domestically with positive macroeconomic indicators, including low inflation and interest rates.
• Policy levers were effectively utilized during crises to push through significant reforms, despite a diminished appetite post-2024 election results.

Policy Reforms and Economic Indicators

• Reforms included GST rate adjustments, changes in labor laws, and nuclear sector amendments to encourage private and foreign investments.
• Other reforms in financial services allowed 100% foreign ownership in insurance firms and new investment rules for banks and pension funds.
• Foreign direct investment surged, with commitments from tech giants like Google, Amazon, and Microsoft.

Current Economic Challenges and Prospects

• India's GDP is projected to grow by 7.3% in fiscal 2026.
• The economy showed robust rural demand, albeit urban demand was still recovering.
• Investment activity showed signs of revival, with private investments picking up due to expansion in non-food bank credit.
• Agricultural growth remained positive, buoyed by healthy crop production.

Global Market and Trade Relations

• India's services exports increased its global market share from 2% to 4.5% over a decade, leveraging remote work due to tougher immigration policies in the US and Europe.
• The AI boom was seen as masking tariff effects, though concerns over American inflation and Chinese export diversion remained.
• India's current account deficit stood at 1.3%, with strong services exports and remittances providing a buffer.

Future Growth and Policy Challenges

• The World Bank emphasized the need for India to sustain a growth rate of 7.8% per annum over the next 22 years to achieve high-income status by 2047.
• While corporate balance sheets are strong, demand visibility is crucial for boosting private investment.
• Capacity utilization needs to be around 80% for sustained investment growth.
• Questions remain over the influence of AI, potential recessions, and labor versus capital productivity.

As 2025 concludes, the Indian economy faces significant challenges and opportunities, with reform initiatives and market dynamics playing pivotal roles in shaping its future trajectory.