The Indian economy in 2025 has moved along a narrow ridge, balancing reform-driven optimism against global uncertainty and domestic stress. While a series of policy decisions on taxation, labour, and trade signalled intent to revive growth and demand, geopolitical shocks and trade disruptions—particularly from the United States—undercut momentum. The year, therefore, stands out not for unambiguous success or failure, but for its contradictions.
Policy tailwinds that supported growth
The year opened on a relatively positive note. In February, Prime Minister and U.S. President announced that India and the United States would work towards a Bilateral Trade Agreement by the fall of 2025. The announcement raised expectations of improved market access and greater trade certainty.
In the same month, Finance Minister Nirmala Sitharaman presented Budget 2025. The Budget rationalised income tax slabs and rates, substantially reducing the tax burden on a large segment of taxpayers. The intent was clear: increase disposable incomes and revive consumption demand at a time when private investment remained cautious.
Later in the year, the focus shifted to indirect taxation. In September, the GST Council scrapped the 12% and 28% slabs, moving most goods to the lower 5% and 18% brackets. This simplification aimed to reduce the tax burden on consumers while improving compliance and predictability for businesses.
Labour reforms and social security expansion
Another notable reform came in November, when the Centre announced the implementation of the four Labour Codes. These reforms expanded social security coverage to contract and gig workers, strengthened minimum wage provisions, and attempted to balance labour flexibility with worker protection.
While their full economic impact will unfold gradually, the Labour Codes signal a shift towards formalisation of employment and greater income security—both crucial for sustaining long-term domestic demand.
Trade agreements as a strategic bright spot
One of the strongest positives of 2025 was India’s progress on trade agreements. In July, India signed the Comprehensive Economic and Trade Agreement with the United Kingdom, securing near duty-free access to the U.K. market and improved mobility provisions for Indian professionals.
The Trade and Economic Partnership Agreement with the European Free Trade Association—comprising Switzerland, Norway, Iceland, and Liechtenstein—came into force on October 1, 2025. Beyond tariff concessions, the agreement includes a commitment by EFTA countries to invest $100 billion in India over 15 years, adding credibility to India’s investment-led growth narrative.
December saw further momentum, with India signing a Comprehensive Economic Partnership Agreement with Oman and concluding free trade negotiations with New Zealand. Under the latter, India is set to receive duty-free access for all its exports to New Zealand, along with a promised $20 billion in investments over 15 years.
The U.S. tariff shock and its fallout
The biggest economic setback of 2025 came from the United States. In April, President Trump announced “Liberation Day” reciprocal tariffs, imposing a 26% duty on Indian goods. Although a temporary 90-day pause was granted to allow negotiations, talks stalled over sensitive issues such as agricultural and dairy market access in India.
When negotiations failed to yield results, the U.S. imposed a 25% tariff on Indian goods on July 31, followed shortly by another 25% “penalty” tariff linked to India’s imports of Russian oil. The combined 50% tariff proved unsustainable and severely disrupted bilateral trade.
Labour-intensive sectors such as textiles, apparel, leather, and engineering goods—where the U.S. is a key market—were particularly affected. Although the government announced an Export Promotion Mission to provide cheaper credit and address non-tariff barriers, details remain sparse, limiting its immediate impact.
Growth outlook and data reforms ahead
Looking ahead, the macroeconomic picture remains mixed. The has projected GDP growth of 7.3% for 2025–26. Since growth in the first half averaged around 8%, this implies a noticeable slowdown in the latter half of the year.
Trade tensions with the U.S. are likely to persist in the near term, keeping export prospects uncertain. However, a significant positive development on the horizon is the long-awaited upgrade of India’s macroeconomic indicators. The base years for GDP, the Index of Industrial Production, and the Consumer Price Index are set to be revised using improved methodologies, promising more accurate measurement of economic performance.
What to note for Prelims?
- Key features of Budget 2025: income tax rationalisation and demand stimulus
- GST slab rationalisation: removal of 12% and 28% slabs
- Major trade agreements concluded in 2025 (U.K., EFTA, Oman, New Zealand)
- RBI’s growth projection for 2025–26
What to note for Mains?
- Role of tax and labour reforms in boosting domestic demand
- Impact of U.S. tariffs on India’s export-oriented sectors
- Strategic importance of trade diversification through FTAs
- Significance of revising macroeconomic data for policy credibility
