Is India on the Path to Becoming the Third-Largest Economy? Insights into 2025's Economic Landscape
India's Economic Outlook for 2025
New Delhi: As the fourth-largest economy globally, India is poised to continue its 'goldilocks' phase characterized by strong growth, low inflation, and a resilient banking sector, alongside reform initiatives that are expected to sustain this economic momentum into 2025.
The upcoming Budget from the BJP-led Union government is anticipated to introduce new strategies aimed at enhancing capital expenditure and attracting private investments, thereby positioning India as a more appealing destination for investors amidst tariff and geopolitical challenges.
India's real GDP growth has shown a remarkable increase, reaching 8.2% in the second quarter of the fiscal year 2025-26, while retail inflation has dipped below the Reserve Bank's lower tolerance threshold of 2% as the year concludes.
With a GDP of USD 4.18 trillion, India has overtaken Japan to secure its place as the world's fourth-largest economy and is on track to potentially surpass Germany within the next 2.5 to 3 years, with projections estimating a GDP of USD 7.3 trillion by 2030.
"The current macroeconomic landscape presents a unique 'goldilocks period' of elevated growth coupled with low inflation," the government noted.
Efforts are underway to update the base year for national accounts from 2011-12 to 2022-23, addressing concerns raised by the International Monetary Fund (IMF) regarding the methodology used for calculating GDP.
On the currency front, foreign portfolio outflows from equity markets have placed downward pressure on the rupee; however, volatility has decreased in November compared to the previous month.
The Reserve Bank's evaluation of the economy indicates that 2025 demonstrated significant resilience despite a challenging global environment, with growth consistently accelerating throughout the year.
This growth has been primarily fueled by strong domestic demand, particularly in rural areas, supported by easing inflation and an uptick in fixed investments.
On the supply side, the services sector has continued to grow steadily, while manufacturing has shown signs of recovery after an earlier slowdown, although some moderation was noted towards the year's end.
Agricultural prospects remain positive, bolstered by increased kharif output and sufficient food grain stocks, which have helped mitigate price pressures.
Reflecting widespread momentum across key sectors, the Reserve Bank of India has revised its GDP growth forecast for FY 2025–26 upward from 6.8% to 7.3%.
International organizations such as the World Bank, IMF, Moody's, OECD, Fitch, and S&P have echoed this optimism.
Experts believe that while growth may moderate, it will remain robust, supported by strong domestic fundamentals, favorable financial conditions, and ongoing reforms.
They also caution that external challenges from global trade uncertainties could impact exports. However, the anticipated conclusion of the ambitious India-US trade deal could further enhance exports and bolster the economy.
There are high hopes that Finance Minister Nirmala Sitharaman will unveil additional measures to deepen reforms and stimulate the economy in the upcoming Union Budget in February.
In the previous budget, she provided significant tax relief alongside initiatives to encourage both domestic and foreign investments.
Major global corporations have announced substantial investments, including Microsoft (USD 17.5 billion by 2030), Amazon (USD 35 billion over the next five years), and Google (USD 15 billion over the next five years).
Additionally, Apple, Samsung, and ArcelorMittal Nippon Steel India have revealed plans for significant expansions.
Experts noted that the series of free trade agreements signed by India is expected to further support economic growth.
The forthcoming India-US trade deal, likely to materialize soon, is anticipated to act as a catalyst for exports and benefit industries, including MSMEs.
In the latter part of 2025, the government reduced GST rates and implemented new labor codes.
Madan Sabnavis, Chief Economist at Bank of Baroda, remarked on the Indian economy's remarkable resilience in 2025, despite the lingering impact of tariffs throughout the year.
"This resilience is attributed to a robust domestic economy. Interestingly, exports have also remained stable, indicating that exporters have successfully negotiated with American clients and diversified their markets," he stated.
The government is expected to maintain its capital expenditure targets, contributing to overall investment. The year is anticipated to have less uncertainty, as tariff issues are expected to be resolved through a deal, leading to a more stable rupee.
Looking ahead, Aditi Nayar, Chief Economist at ICRA, forecasts that growth will remain strong at around 6.5-7% over the coming quarters, supported by policy measures such as income tax and GST reductions, along with 125 basis points in policy rate cuts.
While the Consumer Price Index (CPI) inflation is expected to trend upward, it is likely to remain manageable, averaging just over 4% in FY2027.
"Such growth-inflation dynamics would be quite favorable, even if not as strong as recent performance," Nayar noted, emphasizing the importance of continued job creation in the formal sector to support growth in the near and medium term.
Dharmakirti Joshi, Chief Economist at Crisil, also expressed that the Indian economy exceeded expectations in 2025, with growth surprising on the upside and inflation remaining lower than anticipated.
He pointed out that while India's external vulnerability is relatively low, it faces some of the highest tariffs from the US, which has affected foreign investor sentiment. Consequently, challenges have arisen regarding capital inflows, leading to currency depreciation.
"Looking forward, we project GDP growth at 6.7% and inflation (largely influenced by base effects) at 5% in fiscal 2027. We believe that weak capital inflows and sharp currency depreciation are temporary issues," Joshi concluded.