India on the Move: Policy, Performance, Potential

Background

India’s economy in mid-2025 is showing resilience despite external trade uncertainties, particularly from higher US tariffs. Growth momentum is supported by robust private consumption, rural demand revival, and strong public capital expenditure. Manufacturing PMI rose to a 16-month high (59.1) and services PMI to an 11-month high (60.5) in July 2025, while inflation has eased sharply, creating space for further monetary easing.

Key Takeaways

  • Growth Outlook: RBI projects FY26 GDP growth at 6.5%, with IMF and ADB forecasts slightly lower at 6.4–6.5%, the highest among major economies.
  • Inflation: CPI inflation fell to a 97-month low of 1.6% in July 2025 due to falling food prices and favorable monsoon conditions.
  • Fiscal Position: GoI’s capital expenditure surged 52% in 1QFY26, though gross tax revenue growth slowed to 4.6% due to direct tax contraction.
  • Trade: July 2025 saw export and import growth return to positive territory (7.3% and 8.6% respectively), aided by non-oil exports and crude oil imports.
  • Global Standing: OECD and IMF assess India as the fastest-growing major economy in 2025–26; on PPP terms, India could surpass the US economy by 2038.

Implications

Low inflation, stable monetary policy, and strong fiscal spending create favorable conditions for sustained growth. However, the US tariff impact—estimated at 0.1 percentage points of GDP after mitigation—highlights India’s need for export diversification and domestic demand strengthening. The S&P upgrade to BBB could reduce borrowing costs and attract more investment.

What’s Next?

Policymakers will likely focus on:

  1. GST Reform Implementation – Simplifying rates and compliance to spur demand.
  2. Employment Promotion Scheme Rollout – Supporting job creation in the private sector.
  3. Continued Capex Push – Leveraging public investment to crowd in private investment.
  4. Monetary Easing – Potential rate cuts in response to sustained disinflation.
  5. Export Strategy – Targeting new markets to cushion against US trade policy risks.

With strong domestic fundamentals, India is well-positioned to maintain its global growth leadership while navigating external headwinds.