Reforms and infrastructure development will sustain growth momentum, says the economic review for August

Regulatory reforms and infrastructure development will be key to sustaining India’s growth momentum, the finance ministry said in its August Monthly Economic Review, urging states to leverage cooperative federalism and contribute to this effort by pursuing state-level deregulation.

“The near-term outlook, therefore, is characterized by steady, reform-driven growth rooted in macroeconomic discipline and adaptive economic diplomacy, with ongoing vigilance warranted against external shocks and global market volatility,” added the review released on Friday.

India’s economy defied expectations in the first quarter of 2025-26, with gross domestic product (GDP) growth reaching 7.8%, powered largely by resilient domestic demand.

Robust household consumption and investment have sustained expansion, which the monthly economic review expected would continue into the second half of the fiscal year.

It added that the rationalization of the goods and services tax (GST) has been a key pillar of the government's strategy.

The recent GST slabs overhaul, which came into effect from 22 September, reduced the structure from four slabs to two, introducing a 5% rate for essential items and an 18% standard rate for most goods, alongside a 40% rate for luxury and sin products.

According to the Union finance ministry, the reform simplifies compliance, lowers the tax burden on consumers, stimulates demand, and provides firms with greater visibility to expand capacity.

As things stand, India continues to stand out as the fastest-growing major economy, averaging over 8% GDP growth between 2021-22 and 2023-24and 6.5% in 2024-25. The ministry has forecast that 2025-26 growth will expand between 6.5% and 6.8%.

Mounting external pressures

The US has imposed a 50% tariff on a wide range of Indian goods, particularly affecting labour-intensive sectors such as textiles, gems and jewellery, and footwear. Branded pharmaceutical imports are hit by a 100% tariff, while new H-1B visa restrictions, including a one-time $100,000 fee, pose challenges for India’s IT and skilled services sector.

“Despite trade and tariff-related headwinds, India’s external sector has remained resilient. Strong service exports and remittances have offset the merchandise trade deficit, while gross FDI inflows continue to rise, underscoring India’s appeal as an investment destination,” the ministry said.

It added that labour market momentum is expected to remain positive, though the long-term impact of US visa restrictions will require close monitoring.

Meanwhile, the latest monthly economic review stated that inflation is expected to remain under control, aided by replenished reservoirs ahead of the winter crop.

It noted that the GST rate revisions could also contribute to a one-time reduction in inflation over the next year.

The review also highlighted that India’s macroeconomic stability and commitment to fiscal discipline have earned global recognition.

Japanese ratings agency R&I upgraded the country’s sovereign rating from BBB to BBB+ earlier in September, following similar upgrades by Morningstar DBRS and S&P Global Ratings.

The Organisation for Economic Co-operation and Development (OECD) also revised India’s 2025 GDP growth forecast upward to 6.7%, citing strong domestic demand and the effects of GST reforms.

Still, risks persist, the review warned, citing tariff uncertainties and trade disruptions that could affect exports, employment, and consumption as emerging markets could take time to mature, and global shocks could affect even India’s resilient services sector.

The economic review highlighted the need to invest in water storage and rejuvenation of water bodies, boost agricultural productivity, and strengthen national security and self-sufficiency in critical resources.

It said speedy decision-making, meticulous execution, and adherence to fiscal targets remain central to sustaining growth, noting that these measures help lower the cost of capital for all segments of society.

Looking ahead, the ministry emphasized that regulatory reforms, infrastructure development, and cooperative federalism at the state level will be critical to cushioning the economy against external shocks and putting India on a higher growth trajectory.

“States will do well to leverage cooperative federalism and contribute to this effort by pursuing state-level deregulation, thereby putting India’s economy on a higher growth trajectory,” it added.