In 2025, the Indian economy delivered strong growth while keeping inflation low, despite geopolitical tensions and trade-related headwinds. The government also moved decisively to broaden the growth base through reforms and targeted stimulus, including tax cuts.
Mint examines how the economy fared in 2025, and what lies ahead in 2026.
How good was 2025 for the Indian economy?
Quite strong. The economy expanded at a brisk pace, clocking average gross domestic product (GDP) growth of 7.8% in the first three quarters of the year, with growth in the final quarter (October–December) estimated at 7%. This sets the stage for GDP growth of about 7.6% in calendar year 2025, once again making India the fastest-growing large economy in the world. By comparison, China is expected to grow at around 5% and the US at about 2%.
Importantly, this growth came alongside a sharp moderation in inflation, which fell to 0.71% in November, well below the Reserve Bank of India's lower threshold of 2%.
It wasn’t an easy environment, right?
Not at all. The government faced multiple challenges. The US, India’s largest trading partner, imposed steep tariffs that threatened to disrupt bilateral trade. Hopes of a quick trade deal faded as negotiations stalled. The higher tariffs hit several labour-intensive sectors, including textiles, leather and auto components.
The rupee weakened amid the tariff shock and capital outflows, while foreign investors, drawn to more attractive opportunities elsewhere, began pulling money out of India. Despite repeated efforts, private investment remained sluggish, and domestic consumption showed signs of revival only towards the latter part of the year.
What did the government do?
To revive domestic consumption, the government cut tax rates—reducing personal income tax in February and the goods and services tax (GST) in September.
Following the US tariff shock, it also accelerated trade negotiations with other countries to broaden India’s export base. Trade deals were concluded with the UK, Oman and New Zealand, while talks with the European Union are close to fruition. At the same time, reforms were rolled out across sectors to lift productivity.
Why are reforms critical?
Capital outflows, which have weighed on the rupee, reflect investor concerns about India’s competitiveness. This has slowed foreign direct investment (FDI), while equity investors increasingly view Indian markets as overvalued relative to other emerging economies. Domestic firms, flush with cash, have been investing more overseas than at home.
Reforms are crucial to draw both foreign and domestic investors back. Recent measures, such as labour reforms, the easing of FDI norms and GST 2.0, are steps in that direction. The government is also looking to simplify the Customs Act and other regulations, moves that should improve the ease of doing business in India.
What is the outlook for 2026?
India is likely to continue growing, though at a slightly slower pace. The Reserve Bank of India has projected growth of 7.3% for FY26, while economists estimate GDP growth of 6.5% to 7% in FY27. Much will depend on the strength of the recovery in domestic consumption and private investment.
More diversified exports, aided by new trade deals, should partly cushion the impact of US tariffs, while a trade agreement with the US would provide an additional boost. A good monsoon should keep food inflation in check, although overall inflation is expected to rise towards the 4% level due to adverse base effects.