Why in news?

The Indian economy in 2025 has faced a mixed and uncertain phase. Even as the government rolled out policy measures supportive of growth, their impact has been partly offset by domestic challenges and adverse global conditions, making the economic recovery uneven and fragile.

What’s in Today’s Article?

• What Went Right for the Indian Economy in 2025
• Trade Agreements That Strengthened India’s Economic Outreach in 2025
• U.S. Trade Tensions Undermined India’s Economic Momentum in 2025
• Outlook for the Indian Economy: Cautious Growth with Data Reforms Ahead

What Went Right for the Indian Economy in 2025?

• The year began on a positive note for the Indian economy with a series of growth-supporting policy moves.
• In February, PM Modi and US President Trump announced plans to work towards a India–U.S. Bilateral Trade Agreement by the fall of 2025, raising expectations of improved trade and investment flows.
• The same month, Union Finance Minister presented Budget 2025, which reduced income tax rates and slabs, easing the tax burden for most taxpayers. The move was widely seen as a boost to disposable incomes and consumer demand.
• In September, the GST Council simplified the indirect tax structure by scrapping the 12% and 28% GST slabs and shifting most items to lower slabs—from 12% to 5%, and from 28% to 18%—helping reduce prices and improve consumption sentiment.
• Further, in November, the Centre announced the implementation of the four Labour Codes, expanding social security coverage to contract and gig workers and ensuring benefits such as higher minimum wages, strengthening worker welfare and formalisation.
• Overall, these measures signalled a policy push towards demand revival, tax rationalisation, and labour protection in 2025.

Trade Agreements That Strengthened India’s Economic Outreach in 2025

• 2025 marked a strong year for India’s trade diplomacy, with several major agreements concluded, implemented, or pushed close to completion.
• India–UK Trade Deal: The United Kingdom–India Comprehensive Economic and Trade Agreement, signed in July 2025, grants India duty-free access to most UK markets and improves mobility provisions for Indian professionals and workers.
• India–EFTA Agreement Comes into Force: The Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association—covering Switzerland, Norway, Iceland and Liechtenstein—entered into force on October 1, 2025.
  • Beyond trade concessions, EFTA countries committed $100 billion in investments over 15 years, a target officials believe may be met earlier.
• India–Oman CEPA: In December, India signed a Comprehensive Economic Partnership Agreement (CEPA) with Oman, further expanding India’s footprint in West Asia.
• India–New Zealand FTA: India and New Zealand concluded negotiations on a free trade agreement, under which 100% of Indian exports will receive duty-free access, alongside a $20 billion investment commitment over 15 years from New Zealand.
• India–EU Talks Near Finish Line: According to Piyush Goyal, negotiations with the European Union are in their final stages, though it remains uncertain whether a deal will be concluded before the end of 2025.
• Overall, 2025 underscored India’s push to diversify trade partners, secure market access, and attract long-term investment through ambitious trade agreements.

U.S. Trade Tensions Undermined India’s Economic Momentum in 2025

• The biggest setback for India’s economy in 2025 came from trade frictions with the United States.
• Tariff Shock After Early Optimism
  • After a positive start in February, when India and the U.S. announced plans for a bilateral trade agreement, President Donald Trump declared “Liberation Day” reciprocal tariffs in April.
  • India initially faced a 26% tariff, later paused for 90 days to allow negotiations.
• Breakdown of Trade Talks
  • Negotiations stalled over key issues, especially U.S. demands for market access in India for agricultural and dairy products.
  • As no agreement was reached, the U.S. imposed 25% tariffs on India on July 31, followed by an additional 25% penalty tariff a week later for India’s imports of Russian oil, taking the total to 50%.
• Impact on Indian Exports
  • The steep tariffs severely hurt labour-intensive sectors such as textiles, apparel, leather, and engineering goods, where the U.S. is a major export destination.
  • While New Delhi announced an Export Promotion Mission to provide cheaper credit and help exporters tackle non-tariff barriers, details of the support measures have not yet been released.

Outlook for the Indian Economy: Cautious Growth with Data Reforms Ahead

• The year ahead is expected to be a mixed phase for India’s economy.
• On the downside, the Reserve Bank of India has projected 7.3% GDP growth for 2025–26, implying a notable slowdown in the second half of the year after strong growth averaging 8% in the first half.
• In addition, global trade tensions and tariff-related uncertainties are likely to persist for several more months, weighing on exports and external demand.
• On the positive side, India is set for a long-awaited upgrade of key macroeconomic indicators.
• The base years and methodologies for GDP, the Index of Industrial Production (IIP), and the Consumer Price Index (CPI) will be revised.
• These updates are expected to provide more accurate, contemporary, and reliable measurements of economic activity, inflation, and industrial performance.