 "India's economy in 2025: Low inflation, FTAs and GDP growth amid US tariffs")
For much of 2025, India’s economy navigated a mixed global environment but still marked several clear milestones. Growth continued even as US tariffs widened, inflation eased to more comfortable levels for the Reserve Bank of India, and tax collections helped narrow the fiscal deficit to some extent. New trade agreements with the United Kingdom, the European Free Trade Association, New Zealand and Oman added momentum to India’s external engagement.
One of the year’s headline developments was India edging past Japan in nominal GDP, based on estimates by the International Monetary Fund (IMF), placing it as the world’s fourth-largest economy. These shifts, along with steady quarterly expansions and broadly positive assessments from the World Bank and the IMF, shaped the country’s economic story in 2025.
India becomes world’s fourth-largest economy
One of the major economic highlights of 2025 was India’s rise to become the world’s fourth-largest economy in nominal terms. According to the IMF’s World Economic Outlook, India’s GDP was estimated to reach $4.187 trillion, narrowly surpassing Japan’s $4.186 trillion.
Economists viewed this milestone as more than symbolic. It underscored India’s sustained growth trajectory, driven by strong domestic demand, investment activity and structural reforms, even amid global uncertainty.
Growth momentum amid external headwinds
Despite persistent tensions from rising US tariffs, India sustained its pace of economic growth through the year. The IMF’s 2025 Article IV Consultation noted that while the US continued to impose tariffs on Indian exports, India’s economy was expected to grow at an average of 6.6 per cent in FY26. The IMF also projected inflation to remain stable, while pointing to ongoing reforms—such as labour market changes and efforts to promote foreign direct investment—as factors cushioning the economy against external shocks.
Government data through the year showed strong sequential quarterly expansions, including an 8.2 per cent GDP growth in Q2. This expansion was supported by resilient consumer spending, festival-season demand and advance production scaling by firms.
Inflation easing a standout feature of 2025
Inflation emerged as a standout feature of India’s macroeconomic performance in 2025. The Consumer Price Index softened sharply over the year, with official data showing inflation moving well below the Reserve Bank of India’s target band. In October 2025, headline inflation dipped to an unusually low 0.25 per cent, reflecting easing food prices and Goods and Services Tax (GST) rationalisation.
Food inflation turned sharply negative from mid-year, reaching minus 5.02 per cent in October, driven by ample supplies of vegetables, cereals and pulses, along with GST changes that shaved about 85 basis points off headline inflation. Core inflation, excluding food and fuel, remained sticky at around 4.3–4.5 per cent, reflecting resilient demand in services.
Fiscal position improves on higher revenues
India’s fiscal position also improved during the year, supported by rising tax revenues. Government records showed a substantial increase in both direct and indirect tax collections in 2025. The revised budget estimates for FY26 indicated a 30 per cent rise in tax receipts, pushing total income to ₹15,680 crore.
While expenditure continued to exceed revenue, the stronger inflows helped limit the fiscal gap even as allocations rose across key public sectors. The improved revenue performance reflected higher economic activity and better compliance, allowing policymakers to balance development priorities with fiscal discipline.
India-UK, EFTA, New Zealand and Oman trade deals
Trade diplomacy emerged as a key pillar of India’s economic strategy in 2025, with multiple free trade and partnership agreements concluded or taking effect during the year.
India signed a Comprehensive Economic and Trade Agreement with the United Kingdom in July, delivering tariff cuts and wider market access across goods, services, investment and mobility. The pact provided near-zero-duty access for most Indian exports and phased reductions in tariffs on select UK goods, including automobiles and spirits.
Another milestone was the Trade and Economic Partnership Agreement with the European Free Trade Association—comprising Switzerland, Norway, Iceland and Liechtenstein—which entered into force on October 1. The agreement combined deep tariff concessions with a binding $100 billion investment commitment over 15 years.
India also expanded its footprint in the Asia-Pacific and Gulf regions. In December, India concluded an FTA with New Zealand, aimed at lowering tariffs and boosting trade, services and investment. Earlier the same month, it signed a Comprehensive Economic Partnership Agreement with Oman, strengthening market access, services trade and skilled mobility.
US trade tensions and rupee pressure
Despite these positives, India faced notable trade tensions with the US, including steep tariffs on its exports. These pressures affected investor sentiment through the year and contributed to volatility in the foreign exchange market.
The Indian rupee weakened steadily against the US dollar over the course of 2025, depreciating by about 4–5 per cent for the year. The currency fell from an average of 86.23 in January to close to 90 by mid-December, marking its weakest annual performance since 2022. Analysts attributed the slide to capital outflows, subdued portfolio inflows and the impact of US trade measures.
Global outlook remains supportive
Global forecasts for India remained broadly positive through 2025, even as world growth slowed. The World Bank’s Global Economic Prospects report highlighted softer global expansion due to elevated trade barriers and geopolitical risks, but projected South Asia, led by India, to remain the fastest-growing region.
IMF projections also reaffirmed India’s position as one of the fastest-growing major economies, with steady growth expected through 2026–27. These assessments reinforced confidence in India’s underlying economic resilience.
As global uncertainties persist, analysts note that the challenge for 2026 will be to sustain the growth momentum, deepen market access, and invite more investment. At the same time, safeguarding macroeconomic stability will remain a key task.