India’s economy has shown remarkable resilience in 2025. The first quarter GDP growth of 7.8 per cent surpassed expectations despite global uncertainties and US tariff barriers. Inflation has eased faster than anticipated, prompting the Reserve Bank of India to revise its forecasts downward. However, challenges remain, particularly in export sectors affected by tariffs and slowing global demand.
Current Economic Performance
India’s GDP growth in early 2025 was driven by strong private consumption, government capital spending, and a robust services sector. The Purchasing Managers’ Index indicated sustained manufacturing and services activity. Low inflation boosted real GDP figures by reducing price distortions. Domestic demand remained a key growth pillar, supported by favourable financial conditions and front-loaded exports to the US before tariff hikes.
Inflation Trends and Monetary Policy
Inflation has declined , with consumer price inflation expected to average 3.1 per cent, down from earlier projections of 4 per cent. Food inflation has been particularly mild, benefiting low-income groups more due to their higher food consumption share. Core inflation, excluding gold prices, remains low, easing pressure on the economy. The RBI is considering further repo rate cuts to counteract slowing growth in the latter half of the fiscal year, supported by similar moves by the US Federal Reserve.
Impact of US Tariffs and Global Slowdown
The US’s 50 per cent tariffs on key Indian exports are creating headwinds. Sectors such as textiles, gems and jewellery, and seafood, which heavily rely on micro, small, and medium enterprises (MSMEs), face challenges. These tariffs are expected to slow export growth in the second half of the fiscal year. Additionally, global economic slowdown, particularly in China and the Eurozone, is reducing demand for Indian goods and services.
Sectoral and Regional Challenges
MSMEs in export-intensive sectors are vulnerable due to tariff impacts. Private investment growth remains sluggish despite healthy corporate finances. Government capital expenditure, which boosted the first half, is set to normalise. Flooding in states like Punjab and Rajasthan has damaged kharif crops but has limited pan-India impact. However, ample rainfall has improved water availability, benefiting upcoming rabi crops.
Domestic Consumption and Fiscal Measures
Private consumption is strengthening, supported by low food inflation and income tax reductions. GST rate rationalisation is expected to enhance compliance and formalisation, boosting economic efficiency. Lower GST rates have already reduced prices in several consumer categories, encouraging spending. These domestic factors partially offset external risks and support steady growth.
Strategic Outlook and Reforms
India faces a complex global environment with rising protectionism and tariff barriers. Accelerating economic reforms is essential to maintain growth momentum. Trade agreements can help reduce tariff burdens and stabilise export markets. Targeted fiscal and monetary support may be necessary to assist MSMEs affected by external shocks. Continued policy flexibility will be crucial to navigate these uncertainties.
Questions for UPSC:
- Discuss in the light of recent developments how inflation targeting by the Reserve Bank of India influences economic growth and monetary policy decisions.
- Critically examine the impact of global protectionism and tariff barriers on India’s export sectors and suggest measures to enhance export competitiveness.
- Explain the role of micro, small, and medium enterprises (MSMEs) in India’s economy and discuss the challenges they face in the context of international trade disruptions.
- With suitable examples, discuss the significance of GST reforms in India’s fiscal policy and their impact on consumption and economic formalisation.
