How India's economy defied odds in 2025 — but external shocks left a mark
SOURCE:Times of India|BY:KANCHAN YADAV
India's economy demonstrated remarkable resilience in 2025, achieving 8.2% GDP growth amidst global trade wars and tariffs. A rare 'Goldilocks' phase of low inflation and accommodative monetary policy, coupled with GST 2.0 and tax relief, bolstered domestic demand. The year concluded with mixed stock market trends, record FIIs, rupee pressure and tariffs highlighting ongoing global uncertainties.
This is a representative AI image (Credit: Chatgpt)
As the curtain begins to fall in 2025, India's economic story resists easy labels. Was it the year the country was squeezed by global trade wars and tariffs? Or was it a rare "Goldilocks" moment, marked by strong growth, low inflation and ample policy room to support the economy?The answer lies somewhere in between.The year-end economic review of India reads as a story of resilience, reform and recalibration. From record stock market highs to a weakening rupee, from expanding trade ties to sudden tariff shocks, the year revealed how India’s economic fortunes are increasingly shaped by forces far beyond its borders.India ended 2025 as one of the world's fastest-growing economy — but not without scars!
8.2% GDP growth: A standout year for expansion
India's economic ascent continued to capture global attention in 2025. Already the world’s fourth-largest economy, the country is firmly on track to become the third-largest by 2030, with GDP projected at $6628.0 billion, according to the latest IMF World Economic Outlook report.The headline moment came with the release of second-quarter GDP data for FY 2025-26. Real Gross Domestic Product expanded by a stunning 8.2% during the July–September period — a sharp acceleration from the 5.6% growth recorded in the same quarter last year.The print exceeded market estimates and even surpassed the Reserve Bank of India’s projections, marking a six-quarter high.Combined with a strong 7.8% expansion in the April–June quarter, the economy grew by around 8% in the first half of the financial year, reinforcing India’s position as the fastest-growing major economy globally.
Economists expect growth to remain resilient in the December quarter, supported by stronger consumption following GST rationalisation.
"Now we can comfortably say full year growth will be 7% or north of 7%," Chief Economic Adviser V Anantha Nageswaran said after the data release.The National Statistics Office data cemented India’s position as one of the fastest-growing major economy in the world, even as global growth slowed and tariffs on Indian exports to the US intensified.In its official statement, the government highlighted "Real GDP, adjusted for inflation, rose 8.2% in Q2 FY26, compared with 5.6% in Q2 FY25. Growth in Q1 FY26 stood at 7.8%, up from 6.5% a year earlier. Nominal GDP expanded by 8.7% in Q2, with all major sectors contributing to the expansion. The primary sector grew 3.1% year-on-year, while the secondary and tertiary sectors posted strong growth of 8.1% and 9.2%, respectively.
"Prime Minister Narendra Modi described the numbers as validation of policy continuity and reform-led growth. "The 8.2% GDP growth in Q2 of 2025-26 is very encouraging. It reflects the impact of our pro-growth policies and reforms. It also reflects the hard work and enterprise of our people. Our govt will continue to advance reforms and strengthen the Ease of Living for every citizen," he posted on X.
If growth was the headline, inflation was the surprise.The Reserve Bank of India has described the current macroeconomic environment as a "rare goldilocks" phase, marked by strong growth alongside low inflation.India achieved a historic milestone in October 2025 when retail inflation fell to just 0.25%, the lowest year-on-year print in the current CPI series, according to government data. The print marked a sharp 119-basis-point fall from September, reflecting a dramatic easing in price pressures.Inflation edged up modestly to 0.71% in November, a 46-basis-point increase from October, but remained comfortably below the Reserve Bank of India’s 4% target, underscoring a prolonged period of price stability.The cooling was driven largely by deflation in food prices. CPI inflation stayed benign through 2025-26, prompting the RBI to project average inflation at around 2% for the fiscal year, the lower bound of its tolerance range.The combination of inflation and a growth-oriented monetary stance has created space for further policy support, with expectations building around a complementary demand boost in the Union Budget 2026-27.
RBI cut repo rate
With inflation firmly under control, the central bank moved decisively to support growth. The RBI cut the repo rate during FY 2025-26, lowering it from 6.25% to 5.25%.The Monetary Policy Committee cut the repo rate by a cumulative 125 basis points during the calendar year 2025, bringing it down to 5.25%, while revising its inflation forecast to around 2% and nudging up full-year growth projections to about 7.3%.Including earlier actions, the RBI has now lowered rates by a total of 125 basis points since February 2025, marking its most aggressive easing cycle since 2019.
GST 2.0 kicks in: Simpler taxes, lower costs
One of the most consequential reforms of the year came in September with the launch of GST 2.0. The overhaul simplified India’s indirect tax architecture streamlined into two slabs — 5% and 18%, replacing the earlier four-rate system of 5%, 12%, 18% and 28%.
Most essentials, household items and daily-use goods now attract 5% GST or are exempt.Luxury and sin goods, including pan masala, tobacco, aerated drinks, high-end cars, yachts and private aircraft will be taxed at 40%, ensuring progressivity while safeguarding revenues.Life insurance premiums were made GST-free. Household goods, packaged foods, medicines, consumer durables, automobiles and farm equipment all became cheaper.GST on farm machinery, irrigation equipment and bio-pesticides has been slashed to 5%, reducing input costs and encouraging productivity and sustainable farming practices.The reform eased compliance, reduced costs, boosted festive demand and reinforced domestic manufacturing, delivering relief at both the consumer and enterprise level.
Budget 2025: Big relief for middle class
The Union Budget added another boost, delivering sweeping income tax relief under the new tax regime.
The headline announcement was zero income tax on annual income up to Rs 12 lakh. For salaried individuals, the nil-tax threshold effectively rises to Rs 12.75 lakh, after accounting for the standard deduction of Rs 75,000, offering additional relief to middle-income earners.Slab rates were reworked to ease the burden on middle-income earners, significantly improving disposable incomes. Together, tax cuts, GST rationalisation, record-low inflation, robust GDP growth and accommodative monetary policy have created a supportive economic environment.These factors are expected to lift consumer spending, improve corporate profitability and sustain investment momentum. While currency volatility remains a risk to watch, the broader macro trend points to positive market sentiment and scope for sustained economic expansion.As the RBI summed up, "Economic activity during the first half of the financial year benefited from income tax and goods and services tax (GST) rationalisation, softer crude oil prices, front-loading of government capital expenditure, and facilitative monetary and financial conditions supported by benign inflation."
Stock market showed strong peaks and weak finish
India’s equity markets delivered a mixed performance in 2025, touching record highs and lows during the year, later ending on a softer note as foreign selling intensified amid global uncertainty, geopolitical tensions and shifting trade dynamics.Strong consumer demand, steady government spending and ongoing structural reforms helped markets remain resilient for much of the year.Early 2025: Markets began cautiously, weighed down by global growth concerns, elevated interest rates in advanced economies and trade tensions.
Still, benchmarks opened the year on a positive footing. On January 2, the BSE Sensex stood at 78,507.41 while the Nifty 50 was at 23,742.90, supported by buying in frontline stocks.Mid-year: A recovery was following however, global volatility spiked in April after US President Donald Trump, in his second term, announced sweeping new tariffs on April 2, dubbed "Liberation Day" triggering a sell-off across global markets.Late 2025: Volatility remained in the final months due to foreign portfolio outflows, rupee pressure and uncertainty around global monetary policy and geopolitics. Nifty 50 touched an all-time high of 26,326 on December 1, ending the year with gains of about 10.2%, while BSE Sensex also hit its highest-ever closing level of 86,159.02, reflecting steady gains and improving market breadth through much of the year.However, momentum faded toward the close. In the final sessions, benchmarks declined dragged down by continued foreign investor selling and a lack of strong domestic triggers. The Nifty 50 closed at 26,042.30, down 0.38%, while the Sensex fell 367 points, or 0.43%, to 85,041.45, after touching an intraday low of 84,937.82.Overall, the Indian markets showed a neutral-to-negative note in 2025.
India’s trade push: FTAs take centre stage
Even as protectionism rose, India pressed ahead with trade diplomacy.
India stepped up its trade diplomacy in 2025, concluding key free trade agreements and reviving stalled negotiations as it sought to diversify export markets amid rising global protectionism and tariff barriers.India–New Zealand FTA (2025): India concluded a Free Trade Agreement (FTA) with New Zealand on December 22, paving the way for duty-free entry of all Indian exports into the New Zealand market and a planned investment inflow of $20 billion over the next 15 years.
PM Modi and New Zealand Prime Minister Christopher Luxon announced the deal via social media, with both sides aiming to double bilateral trade within five years.According to the Global Trade Research Initiative (GTRI), the pact strengthens India’s access to a high-income, rules-based Pacific market, while offering New Zealand deeper entry into one of the world’s fastest-growing major economies amid global trade uncertainty.India–Oman CEPA (2025): The India–Oman Comprehensive Economic Partnership Agreement (CEPA) delivers near-complete duty-free access for Indian exports and opens opportunities across labour-intensive manufacturing, services and skilled workforce mobility.The deal marks a major expansion of India’s economic footprint in the Gulf region. Gulzar Didwania, Partner at Deloitte India, described the Oman CEPA and New Zealand FTA as "watershed moments" for India’s export-led growth strategy.
"The India–Oman CEPA delivers zero-duty access on nearly 98% of tariff lines, covering textiles, engineering goods, medical devices, pharmaceuticals and automobiles. Similarly, the India–New Zealand FTA removes tariffs on 100% of India’s exports, opening the NZ market widely and potentially doubling trade over five years," he told TOI.India–UK CETA (2025): The India–UK Comprehensive Economic and Trade Agreement (CETA) offers near-total duty-free access for Indian exports, with significant upside for labour-intensive sectors.India–Israel FTA: India and Israel have been negotiating an FTA since 2010, completing ten rounds covering 280 tariff lines. Talks stalled due to differences over services market access, particularly the temporary movement of Indian IT and skilled professionals. Negotiations gained fresh momentum in November 2025, when both sides signed the Terms of Reference, formally reviving discussions.India has already signed trade agreements with Sri Lanka, Bhutan, Thailand, Singapore, Malaysia, South Korea, Japan, Australia, the UAE and Mauritius. It is also part of:
The ASEAN trade pact (10 Southeast Asian nations)
The EFTA agreement with Iceland, Liechtenstein, Norway and Switzerland
The Downside: Rupee stress, tariffs and rising uncertainty
Despite strong domestic growth, 2025 exposed some of India’s economic vulnerabilities on the global front.
The year was marked by rising trade tensions, currency pressure and heavy foreign capital outflows.
Rupee under pressure amid dollar strength
The Indian rupee remained volatile in December, slipping to a record low near Rs 91 per US dollar on December 16, weighed down by strong dollar demand and sustained foreign portfolio outflows. The rupee recovered some ground the following day, strengthening by 55 paise to close at Rs 90.38 on December 17. A further late-week rebound saw the currency rise from nearly Rs 91 to Rs 89.27 on December 19, though pressure soon returned.On December 26, the rupee closed at Rs 89.86 per dollar, dragged down by falling domestic equities, continued foreign fund outflows and higher crude oil prices.Despite intermittent recoveries, the rupee has emerged as one of the worst-performing emerging market currencies this year, hurt by US tariffs on Indian exports and weak portfolio inflows. The pace of depreciation has been a key concern.After breaching the Rs 90 per dollar level, the rupee slipped past Rs 91 within just 13 days.
In less than a year, it has fallen from around Rs 85 to Rs 90, underscoring the speed of the decline.According to State Bank of India’s Ecowrap report, the rupee is expected to stabilise and recover next year, even as near-term volatility persists.
FII outflows hit record levels in 2025
Foreign institutional investors (FIIs) remained persistent sellers of Indian equities throughout 2025, extending a selling trend that began in October 2024. As a result, 2025 has turned into the worst year on record for foreign equity flows into India.FIIs are set to close the year with a record-breaking exodus from Indian stock markets, marking the steepest annual net outflows ever witnessed in India’s capital markets.As of December 27, FIIs had sold equities worth Rs 22,130 crore through stock exchanges. This took cumulative equity selling in calendar year 2025 to Rs 2,31,990 crore. Investments via the primary market stood at Rs 73,583 crore, bringing net FII outflows for the year to Rs 1,58,407 crore, the highest annual net selling by FIIs since they began investing in India.According to Morgan Stanley, FII positioning in Indian equities is now close to cyclical lows. However, the brokerage cautioned that a sustained return of foreign inflows would depend on stronger growth momentum, relatively weaker equity performance in other markets, or higher corporate issuance levels.While domestic fundamentals remain relatively strong, currency volatility and foreign outflows continue to pose near-term challenges for Indian markets.
Yet 2025 was also defined by global headwinds!
Trade deals amid tariff wars
US President Donald Trump has often spoken warmly of his personal relationship with Prime Minister Narendra Modi, repeatedly describing him as a "great friend." However, Washington’s trade actions toward India in 2025 told a sharply different story.On August 1, the US imposed a 25% tariff on Indian goods, doubling it to 50% by August 27, alongside an additional "penalty" linked to India’s energy ties with Russia.
The move marked one of the most aggressive trade actions taken against India in recent years.Trump accused India of maintaining some of the world’s highest tariffs and what he called "obnoxious" non-monetary trade barriers. He also criticised India’s continued purchases of Russian oil, saying this undermined global efforts to pressure Moscow over the war in Ukraine.His rhetoric escalated in July, when he said,"I don’t care what India does with Russia.
They can take their dead economies down together, for all I care." New Delhi responded firmly stressing that the country remained firmly on track to become the world’s third-largest economy.
India–US trade talks: Progress slow
The United States remains India’s largest export destination, but trade ties faced strain after the Trump administration imposed punitive tariffs of up to 50% on Indian goods.While discussions continue, a final agreement remains elusive.
A recent visit by a US delegation to New Delhi failed to deliver a breakthrough, even as Prime Minister Modi and President Donald Trump have described bilateral engagement as positive.The US is pushing for greater exports of energy and agricultural products, while India has drawn a firm red line on opening its farm sector. Officials now believe a deal could be signed by March.The US administration has repeatedly cited its widening trade deficit with India as a key concern, arguing that India maintains relatively high tariffs on American goods and imposes market-access restrictions.
"We have a massive trade deficit with India," Trump said shortly before the initial 25% tariffs came into effect.According to analysts, 2026 could be the first full year in which countries begin grappling with the real-world consequences of a tariff-heavy global trade system, with implications for investment flows, economic growth, inflation, interest rates and currencies.
Immigration becomes a trade flashpoint
Trade negotiations have increasingly become entangled with US immigration policy, particularly around the H-1B visa programme, a critical channel for India’s services exports.
The US raised the H-1B visa fee to $100,000, up from a previous range of $2,000–$5,000, sharply increasing hiring costs for employers.From December 15, the US State Department also introduced enhanced screening and vetting, including scrutiny of applicants’ social media profiles, for both H-1B and dependent H-4 visas.This shift could significantly disadvantage entry-level professionals and recent international graduates, many of whom are Indian, raising fresh concerns about India’s largest and fastest-growing services export channel to the US.
Mexico: The 50% shock in the trade outlook
One of the most unexpected jolts to India’s trade outlook in 2025 came not from a global superpower, but from Mexico.In December, Mexico announced a blanket tariff hike of up to 50% on imports from non-free trade agreement (FTA) countries, a move aimed at blocking Chinese trans-shipments from entering the United States duty-free. The decision had immediate and significant implications for Indian exporters.Under the measure, import duties ranging from 5% to 50% will apply to around 1,463 product categories from countries that do not have an FTA with Mexico, including India.
The revised tariffs will come into effect from January 1, 2026, though the detailed product list has yet to be officially published.According to estimates by the Global Trade Research Initiative (GTRI), the impact on Indian trade could be severe. "Nearly 75% of India’s $5.75 billion exports to Mexico will be affected as tariffs jump from 0-15% to around 35%," the think-tank said.For Indian exporters, particularly in sectors such as automobiles, textiles, engineering goods and consumer products, the decision threatens to undo years of market-building efforts in Latin America.India and Mexico are currently preparing to begin discussions on a bilateral free trade agreement, with formal negotiation parameters expected to be finalised shortly. Analysts believe such an agreement could help insulate Indian exporters from the tariff shock.
Russia: A relationship grows, but unevenly
India and Russia share a long-standing relationship, with economic ties dating back to the Soviet era. In the decades since, bilateral trade and investment have steadily expanded, with cooperation spanning energy, defence, pharmaceuticals and information technology.In the post-Soviet era, India–Russia trade rose from $1.4 billion in 1995 to a record $68.7 billion in FY 2024–25. Indian firms have invested in Russia’s oil and gas, pharmaceutical and IT sectors, while Russian companies have put money into India’s energy, infrastructure and manufacturing industries.Yet behind the headline numbers lies a growing imbalance that threatens to complicate the partnership.
A trade corridor dominated by oil
The India–Russia energy corridor has emerged as a defining feature of bilateral trade—especially since the outbreak of the Ukraine war and the imposition of Western sanctions on Moscow.In FY 2024–25, India’s imports from Russia stood at roughly $63.8 billion, driven overwhelmingly by crude oil and petroleum products. In contrast, India’s exports to Russia were only about $4.9 billion, leaving a massive trade gap.India’s dependence on Russian crude has remained high despite Western sanctions. In November 2025, India imported 1.77 million barrels per day (bpd) of Russian oil, marking a 3.4% increase over October.Estimates suggest that imports in December 2025 could reach as much as 1.5 million bpd, supported by strong volumes exceeding 1.2 million bpd earlier in the month.The appeal is clear: discounted prices.Russian oil has remained attractive due to aggressive pricing by non-sanctioned producers. Indian refiners—both public and private—have continued to capitalise on these discounts.Imports from Russia surged from $5.94 billion in 2020 to $64.24 billion in 2024, with crude oil now forming the largest share of goods flowing from Russia to India.The bilateral trade agenda gained further momentum during President Putin’s December visit to India, which reinforced energy and strategic cooperation while reaffirming the ambitious $100 billion trade target by 2030.On December 6, India and Russia vowed to scale up bilateral trade to $100 billion by the end of the decade. PM Modi also said both countries were "actively working" towards the early conclusion of a Free Trade Agreement with the Eurasian Economic Union, which includes Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan.However, the very factors that propelled India–Russia trade growth are now introducing new complications. Western sanctions are steadily reshaping India’s oil trade, according to a report by Rubix Data Sciences, reducing dependence on discounted Russian crude and redirecting energy flows towards the United States and the United Arab Emirates.The effects have been particularly visible in exports. In hindsight, 2025 will be remembered neither as a flawless "Goldilocks year nor as one derailed by tariffs." The economy did well even under pressure, but enters 2026 with unresolved global headwinds!
