If there was one feature that characterised the Indian economy in 2025, it was uncertainty. This stemmed from both internal and external factors. The penal tariffs imposed on India by US President Donald Trump were central to this uncertainty. These measures affected India’s exports, balance of payments, the depreciation of the rupee against the dollar and the decline in net foreign investment, among other outcomes. President Trump campaigned on the slogan MAGA (Make America Great Again), so it was evident that he would aggressively pursue pro-US policies. He accused India and China of taking away good jobs from American workers and promised to bring them back. He urged US multinational corporations to invest in the United States rather than abroad, signalling a likely decline in US investment overseas.
Within India, private investment remained subdued despite an increase in public investment. According to RBI data, capacity utilisation has hovered between 70 and 75 per cent over the past several years, indicating weak demand in the economy. This has adversely affected growth and employment generation. The conditions that shaped the economy in 2025 are likely to persist into 2026.
The first major economic event of 2025 was the presentation of the Union Budget on February 1. It sought to address the demand problem by raising the income tax exemption limit to ₹12 lakh, six times the per capita income. This was expected to increase disposable income among well-off taxpayers and boost their consumption. However, the budget left untouched the vast unorganised sector, which employs 94 per cent of the workforce. It also reduced duties on major US exports, signalling to President Trump India’s intent to reduce its trade surplus with the United States.
Trump signed a memo on February 13 asking his staff to prepare to levy “reciprocal Tariffs” by April 1 on the rest of the world, including India. India expected favourable treatment as a strategic partner, but this hope was dashed when a 25 per cent tariff on India was announced on April 2, labelled “Liberation Day”. This was initially held in abeyance until July, as Trump sought to negotiate 90 deals with 90 countries in 90 days. The deadline was later extended to August 1 for countries with which no trade deal had been reached. On August 7, Trump announced a further 25 per cent penal tariff, on top of the reciprocal tariff, because India was purchasing crude oil from Russia. This marked the second major economic shock.
The third significant event followed soon after. Prime Minister Narendra Modi announced a reduction in GST rates on several items during his Independence Day speech. This was expected to lower prices and boost consumption to offset the adverse effects of US tariffs. Sales of these items stalled briefly in September but rose sharply thereafter following the GST cuts. The fourth development was the sharp rise in GDP numbers for the first and second quarters of 2025-26. Officials, citing the IMF, claimed that India had become the world’s fourth-largest economy, ahead of Japan. However, this was a projection for the end of the year and depended on factors such as relative inflation and currency parity with the dollar. More importantly, India ranked 140th in per capita income and remained far poorer than Japan.
The fifth issue was the IMF expressing doubts about the reliability of India’s GDP data, particularly figures relating to the unorganised sector and the large discrepancies in GDP estimates. This dented foreign investor sentiment, contributing to capital outflows from India. Foreign institutional investors have been redirecting funds to US stock markets, where technology stocks have been driving gains. Returns in dollar terms have also fallen due to the depreciation of the rupee.
The sixth feature was the aforementioned decline of the rupee, which crossed the ₹90 mark against the dollar. Tariffs and rising imports of gold, whose prices have increased, have widened the current account deficit. Earlier, capital account inflows helped finance this deficit, but they no longer do so as flows have turned negative.
The seventh development was the constitution of the Eighth Pay Commission under terms markedly different from its predecessors, underscoring the fragile fiscal health of both the Centre and the States. Closely related was the eighth issue: the submission of the Finance Commission’s report. This will affect fiscal federalism, particularly as the financial position of many State governments has been weakened by election-time freebies.
The ninth feature was the passage of the Sustainable Harnessing and Advancement of Nuclear Energy for Transforming India (SHANTI) Bill 2025 on nuclear liability. The bill allows, for the first time, limited private participation in the nuclear energy sector under regulatory oversight. If it facilitates the setting up of nuclear power plants, it could help reduce dependence on fossil fuels. Alongside this came the introduction of a higher education bill, which has been referred to a Parliamentary Committee. The bill aims to boost higher education by granting greater autonomy. Without such reforms, India will continue to lag behind other countries in research and development, undermining its strategic autonomy.
Finally, labour laws were amended abruptly. The implementation of labour codes was announced, and MGNREGA was replaced by VBGRAMG. Both measures are intended to reduce wage costs for businesses and affluent farmers. Presumably, these changes are aimed at boosting exports and enabling the government to open agricultural markets to US imports. Inequality and unemployment are likely to rise as a result.
In sum, the major economic developments of 2025 were driven by uncertainty, both global and domestic. These persistent features are set to continue shaping the Indian economy as it moves into 2026.
(Arun Kumar is a former professor of Economics at Jawaharlal Nehru University)
