India’s economy in 2025 faces challenges due to global trade tensions and domestic structural issues. Although the government has taken steps such as cutting the Goods and Services Tax (GST) and engaging exporters, deeper reforms remain urgent. The shock of external tariff pressures has faded, but the opportunity to transform the economy is slipping away. Below is an analysis of the current economic context and key areas for improvement.
Recent Economic Context
India’s macroeconomic position remains stable with a fiscal deficit contained at 4.8% last year and a target of 4.4% this year. Growth continues at a healthy pace despite global uncertainties. However, the government’s cautious fiscal stance limits the scope for increased investment in critical sectors. The Chief Economic Advisor has expressed concerns about raising the deficit, fearing risks to the borrowing programme. Yet, many economists argue that modestly higher deficits are necessary to fund reforms and investments that will drive long-term growth.
Structural Reforms Needed
Key reforms include land policy changes, boosting agricultural productivity, and creating meaningful employment opportunities. Other priorities are correcting power and transportation pricing distortions and improving the ease of doing business. Additionally, investment in education, healthcare, and research and development is essential to build a competitive economy. Without addressing these foundational issues, India’s growth risks remaining uneven and vulnerable to external shocks.
Exchange Rate Policy and Export Competitiveness
Since early 2025, the Indian rupee has been among the worst-performing currencies globally. Despite a global dollar weakness, the rupee has remained weak due to the Reserve Bank of India’s (RBI) focus on supporting exporters. However, this strategy has not translated into export growth, which has remained nearly flat. Imports have grown faster, contributing to inflationary pressures. A rigid policy of maintaining a weak rupee may harm the broader economy, especially when global growth is uncertain.
Need for Smarter Monetary Tools
The RBI’s current approach lacks flexibility to respond to changing global conditions. A more nuanced exchange rate policy that considers global growth forecasts and domestic competitiveness could improve inflation control and economic stability. Incorporating advanced technologies like artificial intelligence to guide these decisions could enhance policy effectiveness. Balancing export support with overall economic health is crucial for sustainable growth.
Government Investment and Growth Strategy
An aggressive investment approach in infrastructure, social sectors, and innovation is needed to unlock India’s economic potential. While fiscal prudence is important, strategic deficits may be justified to fund transformative projects. The government must prioritise reforms and investments that build resilience against external shocks and encourage inclusive growth.
Questions for UPSC:
- Point out the impact of exchange rate policies on inflation and export competitiveness in emerging economies with examples from India.
- Critically analyse the role of fiscal deficit management in balancing economic growth and financial stability in developing countries.
- With suitable examples, estimate the importance of structural reforms like land and labour policies in enhancing agricultural productivity and employment in India.
- Underline the challenges and opportunities presented by global trade tensions for India’s economic development and policy responses.
