The year 2025 will be etched in India's economic history as a period of remarkable resilience and strategic transformation. Amidst global trade wars and volatile capital flows, the nation adeptly turned external challenges into opportunities for robust domestic growth. As we step into 2026, the focus shifts from achieving growth to sustaining this hard-earned momentum in an unpredictable world.
The 2025 Turnaround: Domestic Reforms Anchor Growth
Global economic shifts, driven by policy changes in Western nations, created significant turbulence in 2025. India confronted higher US tariffs on its exports, record foreign portfolio outflows, and a rupee that briefly weakened past 91 against the dollar. However, the country's vast domestic demand emerged as a steadfast anchor, preventing a derailment of growth.
This stability was no accident. A concerted policy push provided the foundation. The Union Budget for 2025-26 delivered long-pending tax exemptions for the middle class, later complemented by a rationalisation of GST slabs. These moves directly boosted disposable incomes and consumer confidence. On the monetary front, the Reserve Bank of India (RBI) executed a sharp pivot, cutting policy rates by a substantial 125 basis points to revive credit growth after a period of tightening.
Structural reforms also gained critical mass. The long-awaited labour codes were finally implemented, promising easier compliance, greater job formalisation, and an overall improvement in the ease of doing business. Public investment in infrastructure and capital formation remained strong, providing a further growth impetus.
External Recalibration and a Stellar Report Card
Externally, India smartly recalibrated its trade strategy. The landmark India-UK Free Trade Agreement was a highlight, with significant progress also made towards a pact with the European Union. Simultaneously, India deepened economic ties with emerging economies across Asia, Africa, and Latin America, regions expected to outpace global trade growth. This dual approach reflects a strategic shift towards strengthening South-South commerce.
The results of these efforts were impressive. By the close of 2025, India's GDP growth hit 8%. Private consumption surged, aided by tax relief and improved rural conditions. Government capital expenditure was aggressive, with 51.8% of the annual allocation utilised in the first half of the fiscal year. The manufacturing and services sectors each grew over 9%, with services now contributing 60% of gross value added and nearly half of all exports. The crowning achievement came in August 2025, when India earned its first sovereign credit rating upgrade in 18 years, a powerful symbol of global confidence in its economic fundamentals.
Navigating 2026: Persistent Risks and the Budget Pivot
Despite the strong performance, uncertainty lingers. A comprehensive US-India trade deal remains elusive, and steep tariffs continue to weigh on export sectors and investment decisions. Slowing growth in major economies also poses a risk due to India's trade linkages.
Domestically, three key challenges demand attention. First, weak transmission of RBI's rate cuts to borrowers, especially MSMEs and households, limits the effectiveness of monetary policy. Second, inflation risks persist, with core inflation staying above 4% and the potential for imported inflation from the West and a weaker rupee. Finally, fiscal pressures may emerge if tax revenues slow following recent reforms, potentially restricting the government's spending capacity in the next fiscal year.
All eyes are now on the upcoming Union Budget, which is expected to pivot from demand-pull measures to supply-side reforms. The focus will likely be wide-ranging, with priority areas including:
- Support for MSMEs through easier credit access, cash-flow-based lending, and dedicated liquidity funds.
- Sustained investment in infrastructure, innovation, and R&D.
- Further reforms to improve the ease of doing business, including streamlined customs processes.
- Relief measures, such as tax breaks, for sectors hit by global tariffs (e.g., textiles, jewellery, auto, shrimp).
The budget may also shift attention from just the fiscal deficit to the broader debt-to-GDP trajectory, aiming to create more fiscal space for crucial capital investments. With prudent policies and strategic investments, India is poised to reinforce its position as one of the world's fastest-growing major economies, even amidst global volatility.
