Despite a downward revision in growth forecasts, India is expected to remain the fastest-growing major economy in 2025, according to a recent United Nations report. The mid-year update of the "World Economic Situation and Prospects" projects India's GDP to grow at 6.3% in the current fiscal year. This figure, while slightly lower than the 6.6% projection made in January, still positions India ahead of other major economies like China (4.6%), the US (1.6%), Japan (0.7%), and the European Union (1%). The UN anticipates India's economy to expand by 6.4% in 2026.
Several factors contribute to India's strong economic performance. Robust domestic demand and consistent government spending are key drivers, fostering stable employment and helping to keep inflation in check. The UN expects inflation to moderate from 4.9% in 2024 to 4.3% in 2025, remaining within the Reserve Bank of India's target range. Furthermore, strong household spending, solid government investments, and booming services exports are fueling India's growth.
India's financial markets reflect this optimism. Stock indices have shown solid gains, supported by sustained investor confidence. Retail investors have surged from 49 million in FY20 to 132 million by December 2024, demonstrating strong faith in India's long-term economic potential. The primary market has also been active, with initial public offerings (IPOs) rising by 32.1% between April and December 2024 compared to the previous year. Manufacturing activity is picking up, aided by favorable policies and resilient external demand. Exports, particularly in strategic sectors like defense production, are steadily expanding.
In 2024-25, India's total exports reached a record USD 824.9 billion, a 6.01% increase from the previous year. Services exports were a key growth driver, reaching an all-time high of USD 387.5 billion, a 13.6% increase from 2023-24. Merchandise exports excluding petroleum products also set a new record, climbing to USD 374.1 billion, a 6.0% increase.
Despite the positive outlook, the UN report highlights potential challenges. Rising trade tensions and policy uncertainty pose risks to the global economy. The report also notes that potential US tariffs could weigh on India's merchandise exports. However, sectors currently exempt from these tariffs, such as pharmaceuticals, electronics, semiconductors, energy, and copper, could limit the economic impact.
Other economists share the UN's cautiously optimistic outlook for India. A survey by FICCI indicates that economists expect consumer spending to gain momentum, driven by an improved outlook for the agriculture sector. They also anticipate that easing food inflation will boost urban consumption. Deloitte notes that temporary headwinds, such as election-led policy caution and irregular rainfall, have muted momentum in the first three quarters of FY2025, but high-frequency indicators point to a strong domestic engine. The government's expected boost in spending through direct tax exemptions could further add to GDP growth in FY2026.
