Paper: GS – III, Subject: Economy, Topic: Trade and External Sector, Issue: India’s Economic Achievements in 2025.
Context:
India ended 2025 with strong macroeconomic indicators despite US tariff hikes, AI-driven uncertainty, and global trade disruptions. However, reviving domestic demand has emerged as the government’s biggest challenge for sustaining growth in 2026.
Key Takeaways:
Key Economic Achievements in 2025:
India defied pessimism by maintaining resilience:
- Export Resilience: US exports rebounded in November after early dips, driven by tariff-exempt items (pharma, electronics) and diversification to new markets.
- Services exports grew, with India’s global share rising from 2% to 4.5%, aided by remote work amid visa restrictions.
- Macro Stability: Tepid inflation, low interest rates, managed rupee depreciation (over ₹90/USD acting as tariff buffer), and FDI surge from tech giants (Google, Amazon, Microsoft) in cloud/AI offset CAD widening to 1.3%.
- Policy Reforms: NDA government pushed GST rationalization, labor law updates, nuclear amendments (easing private/foreign entry), 100% FDI in insurance, and revoked quality control orders (QCOs) burdening SMEs in textiles/steel. MGNREGA curbs aimed at fiscal discipline.
These steps countered initial fears of stalled exports and capital outflows, helping wrap 2025 with “fairly strong” numbers.
Domestic Outlook for 2026: Tailwinds and Buffers:
High-frequency indicators show activity holding up in Q4 2025, with GDP projected at 6.7-6.8% for early FY27:
Positive Drivers:
- Healthy kharif/rabi crops supporting agriculture (positive growth).
- GST robustness, non-food bank credit expansion, capacity utilization at 75-77% (edging toward investment revival).
- Strong corporate balance sheets, low leverage, low inflation, and festival spending boosting rural demand (urban recovering slowly).
Reform Momentum:
- Nuclear opening could revive power investments; new labor codes and regulatory easing to boost medium-term growth.
- Chief Economic Adviser V Ananth Nageswaran noted FY26 growth at ~7%, above initial south-of-7% fears.
Major Headwinds: Consumption and External Risks
Private investment hinges on demand visibility crucial as government capex slows and exports face drags:
- Consumption Weakness: Urban demand lags; high – capacity utilization (80%+ for 3 quarters) needed for greenfield projects. World Bank says 7.8-8% average growth required for high-income status by 2047, but trend has been 6-7%.
- Tariff and Trade Uncertainty: 25% reciprocal + 25% Russia crude penalty tariffs persist; no US deal in sight. Chinese exports flooding Asia (post-US blockade) adds pressure.
- Global Factors: AI boom masks US labor weakness/inflation risks; potential recession, stock bubble burst, or debt monetization (inflating away deficits) could spill over. Tighter migration in US/Europe hits services.
- Financing Risks: CAD manageable via remittances/services, but FPI outflows from equities continue amid earnings slowdown.
| Challenge | Policy Lever | Potential Impact |
| Tepid Private Capex | Boost demand visibility via consumption | Raises capacity utilization to 80%+ for investments |
| CAD Widening | Trade deals (EU, others); rupee buffer | Offsets outflows, sustains FDI |
| Labor vs. Capital | New labor codes; skill upgrades | Harnesses youth bulge amid AI/capital productivity rise |
| External Shocks | Market diversification; remote services | Counters tariffs, Chinese dumping |
India has successfully absorbed global tariff shocks through diversification and macro stability, but long-term growth now depends on reviving domestic consumption. Without stronger demand, private investment and India’s demographic advantage may remain underutilised.
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