.png){kind=logo}
India’s economy is set to grow around 6.4% in 2025, led by strong domestic demand and global recognition.
Inflation dropped to a 7-year low of 1.55%, giving room for stable monetary policy.
Rising US tariffs and trade deficit pose the biggest risk to sustained growth.
India’s economic outlook is showing resilience and steady momentum this year. Growth remains strong compared to other large economies, inflation is at a multi-year low, and foreign exchange reserves are at record levels. At the same time, the economy faces fresh challenges such as global trade tensions, a widening trade deficit, and pressure on exports. The picture that emerges is of a country continuing to grow faster than its peers while needing to balance risks from outside shocks and domestic job creation.
India continues to be one of the fastest-growing major economies in the world. The International Monetary Fund expects the economy to grow by 6.4 percent in 2025 and 2026. The World Bank also forecasts growth of 6.3 percent for FY2025-26. Both institutions have noted that India’s economy is outperforming global peers and is set to remain the top performer among major nations.
Recent industry surveys confirm this strong momentum. The HSBC-S&P Global Manufacturing Purchasing Managers’ Index rose to 59.1 in July 2025, the highest in 16 months. The composite PMI, which covers both services and manufacturing, stayed above 60, indicating robust expansion. Industrial production, however, has shown slower progress. In June 2025, the Index of Industrial Production grew by just 1.5 percent year-on-year, with mining and electricity sectors weaker while manufacturing and capital goods gave some support.
Consumer demand is showing mixed signals. Passenger vehicle sales dipped slightly in July, while sales of two- and three-wheelers increased along with export orders. This points to a gradual normalization of demand after two very strong years.
One of the most striking economic developments in 2025 has been the sharp drop in inflation. Retail inflation fell to 1.55 percent in July 2025, the lowest since mid-2017. The decline came mainly from falling food prices and favorable base effects. With inflation far below its target, the Reserve Bank of India kept the repo rate unchanged at 5.50 percent in its policy review on August 6. The central bank has already cut rates earlier in 2025 and is now waiting to see how growth and inflation trends develop.
Although inflation is unusually low at the moment, analysts expect it to rise somewhat in the coming months as the statistical base effect wears off. A good monsoon will play a big role in keeping food inflation contained. The India Meteorological Department has forecast an above-normal monsoon of around 106 percent of the long-period average. Rainfall in mid-August was in line with expectations, which bodes well for the kharif crop and rural demand.
The government is trying to strike a balance between reducing the fiscal deficit and maintaining high spending on infrastructure. In the Union Budget for FY2025-26, the fiscal deficit target was set at 4.4 percent of GDP, down from 4.8 percent in FY2024-25. At the same time, the government has committed to a high level of capital expenditure worth Rs. 11.21 lakh crore, equal to about 3.1 percent of GDP.
Tax revenues have remained strong, with GST collections reaching Rs. 1.96 lakh crore in July 2025, a growth of 7.5 percent from a year earlier. This strong revenue performance gives the government more room to invest in infrastructure while bringing down the deficit.
An important boost came in mid-August when S&P Global upgraded India’s sovereign credit rating from BBB- to BBB. The agency cited resilience in growth and fiscal consolidation as reasons for the upgrade. This step is expected to reduce borrowing costs and attract more investment.
India’s external position remains solid despite pressures from global trade tensions. Foreign exchange reserves stood at around $694 billion in early August 2025, enough to cover about 11 months of imports. This level of reserves gives the country a strong buffer against external shocks.
The current account has also improved. In the last quarter of FY2024-25, the balance showed a surplus of $13.5 billion, equal to 1.3 percent of GDP. For the full year, the current account deficit narrowed to 0.6 percent of GDP, supported by strong services exports and remittances from abroad.
At the same time, there are new risks. In July, the United States announced an additional 25 percent tariff on Indian goods, raising combined levies to about 50 percent on some products. This creates concern for exports in labor-intensive sectors such as textiles, leather, and gems. The impact is already visible in trade numbers. The merchandise trade deficit widened to $27.35 billion in July, the highest in eight months, as imports grew faster than exports.
One positive development is India’s growing presence in global bond markets. Indian government bonds have been included in the JPMorgan and Bloomberg global indices, and they will also join the FTSE Russell index in September 2025. This inclusion is expected to attract more foreign investment into Indian debt and help stabilize the external account.
In July 2025, India and the United Kingdom signed a free trade agreement. Once ratified and implemented, the deal is expected to reduce tariffs, expand access to markets, and benefit both goods and services sectors. However, trade talks with the United States remain stalled due to tariff disputes, which casts uncertainty over future cooperation with Washington.
On the investment front, the government’s push to develop a semiconductor and electronics ecosystem is beginning to show results. The Tata-PSMC semiconductor fabrication project in Dholera has been approved, and several joint ventures in chip packaging and electronics manufacturing were announced in 2025. These investments mark an important step toward building domestic capacity in critical industries.
Domestic demand continues to support growth. Urban consumption is steady, and rural demand is expected to improve with better rainfall and lower food prices. Auto sales patterns reflect this trend, with passenger vehicles softening slightly but two-wheelers and exports improving.
Credit growth remains healthy, supported by lending to services and retail borrowers. However, growth in heavy industries has been slower. The core industrial sectors grew by just 1.7 percent year-on-year in June, showing moderation compared to last year.
Employment remains one of the key challenges. Official data put the unemployment rate at 5.6 percent in June, but independent surveys such as CMIE report higher numbers. The gap highlights ongoing concerns about job quality and opportunities. Sustained investment in manufacturing, small businesses, and services exports will be necessary to generate broad-based employment.
The economic outlook has both promising opportunities and significant risks. On the positive side, the combination of strong growth, low inflation, and record reserves gives India a cushion against global shocks. The sovereign rating upgrade and inclusion of bonds in global indices will likely attract more foreign investment. The free trade agreement with the United Kingdom also opens up new opportunities for exporters.
On the negative side, the new US tariffs pose a clear threat to exports, especially in sectors that employ large numbers of workers. A slowdown in global demand could also affect India’s engineering goods, electronics, and IT services. There are concerns about whether the government can maintain fiscal discipline if revenues weaken or growth slows.
Also Read: How to Earn Passive Income from Stocks
India is expected to grow by 6.3 to 6.5 percent in 2025, keeping it among the world’s fastest-growing economies. Inflation is unusually low but will likely move closer to normal levels later in the year. The fiscal position is improving, and government spending on infrastructure remains strong.
Foreign exchange reserves and current account improvements provide stability, while new trade agreements and foreign investment in bonds and manufacturing offer growth prospects. However, risks from global trade tensions and a rising trade deficit cannot be ignored.
The outlook suggests that India will continue to be a key driver of global growth in 2025, provided that policymakers manage inflation carefully, support job creation, and address export challenges.
