The Indian economy delivered a robust performance in 2025, maintaining its status as the world's fastest-growing major economy despite significant global headwinds. However, as the nation steps into 2026, questions loom about the durability of this expansion. The coming year presents tougher tests, with the growth trajectory hinging critically on a revival in domestic consumption, a sustained pickup in private investment, continued reforms, and the uncertain external environment.
A Strong 2025: Growth Amidst Challenges
The year 2025 was notably strong for India. The economy expanded at a brisk pace, clocking an average gross domestic product (GDP) growth of 7.8% in the first three quarters (January-September). Growth in the final quarter (October-December) is estimated at 7%. This sets the stage for an overall GDP growth of about 7.6% for the calendar year 2025, once again outpacing other large economies. For comparison, China is expected to grow at around 5% and the United States at about 2%.
Importantly, this impressive growth was achieved alongside a sharp moderation in inflation. The inflation rate fell to 0.71% in November 2025, dipping well below the Reserve Bank of India's (RBI) lower tolerance threshold of 2%. This combination of high growth and low inflation was achieved in a far-from-easy global environment.
Navigating Headwinds: Tariffs and Tepid Investment
The government faced multiple challenges throughout the year. The United States, India's largest trading partner, imposed steep tariffs that threatened to disrupt bilateral trade. Hopes for a quick trade deal faded as negotiations stalled. These higher tariffs adversely impacted several labour-intensive export sectors, including textiles, leather, and auto components.
The external shock contributed to a weakening rupee amid capital outflows. Foreign investors, drawn to more attractive opportunities elsewhere, began pulling money out of Indian markets. On the domestic front, private investment remained sluggish despite repeated efforts to stimulate it. Signs of a revival in domestic consumption were visible only towards the latter part of the year.
Policy Response: Tax Cuts and Trade Diversification
To counter these challenges and revive domestic demand, the government deployed targeted fiscal measures. It announced personal income tax cuts in February followed by a reduction in the goods and services tax (GST) rates in September 2025.
In response to the US tariff shock, India accelerated trade negotiations with other nations to broaden its export base. The year saw the conclusion of trade deals with the United Kingdom, Oman, and New Zealand. Furthermore, negotiations with the European Union are reported to be close to fruition. Parallelly, the government rolled out productivity-enhancing reforms across sectors.
The Critical Role of Reforms and the 2026 Outlook
Reforms are seen as critical to addressing underlying investor concerns. Capital outflows reflect worries about India's competitiveness, which has slowed foreign direct investment (FDI). Equity investors have started viewing Indian markets as relatively overvalued compared to other emerging economies. Notably, domestic firms, flush with cash, have been investing more overseas than at home.
Recent reform measures—such as labour reforms, eased FDI norms, and the proposed GST 2.0—aim to draw both foreign and domestic capital back. The government's intent to simplify the Customs Act and other regulations should further improve the ease of doing business.
Looking ahead to 2026, India is likely to continue growing, albeit at a slightly slower pace. The Reserve Bank of India has projected a growth rate of 7.3% for FY26. Economists estimate GDP growth in the range of 6.5% to 7% for FY27. The actual outcome will depend heavily on the strength of the recovery in domestic consumption and private investment.
New trade deals are expected to help diversify exports and partly cushion the impact of US tariffs. A potential trade agreement with the US itself would provide a significant additional boost. A good monsoon should help keep food inflation in check, although overall inflation is expected to rise towards the RBI's 4% target due to adverse base effects. The durability of India's growth story now faces its next crucial exam in 2026.
