Indian Economy in 2025: Reforms, Trade Wins — and a Trump-Sized Roadblock

For the Indian economy, 2025 has been a year of contrasts. On one hand, the government pushed through politically difficult reforms on taxation, GST and labour, while accelerating trade integration with key partners. On the other, global headwinds — particularly a sharp turn in U.S. trade policy — disrupted exports and injected uncertainty into growth prospects. As the year closes, India’s economic story is one of partial gains, stalled momentum, and unresolved risks.

A Positive Start: Tax Relief and Early Trade Optimism

The year began on a relatively upbeat note. In February, Prime Minister Narendra Modi and U.S. President Donald Trump jointly announced plans to work towards a bilateral trade agreement by autumn 2025. The announcement briefly raised expectations of deeper India–U.S. economic integration.

Around the same time, Finance Minister Nirmala Sitharaman presented Budget 2025, which restructured income-tax slabs and rates to reduce the burden on most taxpayers. The intent was clear: boost disposable incomes and revive consumption demand at a time when private spending was showing signs of fatigue.

GST Rationalisation: Lower Rates, Broader Relief

In September, policymakers addressed demand from another angle. The GST Council scrapped the 12% and 28% slabs, shifting most items into lower brackets — from 12% to 5%, and from 28% to 18%.

This rationalisation simplified the tax structure and effectively reduced indirect taxes on a wide range of goods, offering relief to consumers and businesses alike. It was one of the most significant GST reforms since the system’s launch, aimed at easing compliance and stimulating consumption.

Labour Codes: A Structural Reform with Long-Term Impact

In November, the Centre announced the implementation of the four Labour Codes, extending social security to contract and gig workers and promising higher minimum wages and improved protections.

While the immediate economic impact may be limited, the move addressed long-standing concerns about labour formalisation and worker welfare. Over time, it could support productivity gains and more inclusive growth — provided States implement the codes effectively.

A Strong Year for Trade Agreements

One of 2025’s standout positives was India’s progress on trade deals. The India–U.K. Comprehensive Economic and Trade Agreement, signed in July, granted India duty-free access to most of the U.K. market and eased mobility for Indian professionals.

The Trade and Economic Partnership Agreement with the European Free Trade Association (EFTA) — covering Switzerland, Norway, Iceland and Liechtenstein — came into force in October. Beyond tariff cuts, EFTA countries committed to invest $100 billion in India over 15 years, a target Iceland’s Ambassador has said could be reached much sooner.

December saw further momentum: India signed a Comprehensive Economic Partnership Agreement with Oman and concluded free trade negotiations with New Zealand, securing duty-free access for all Indian exports to that market, along with a $20 billion investment commitment over 15 years.

The U.S. Turnaround: From Promise to Protectionism

The biggest economic setback of 2025 came from Washington. After the initial trade optimism, President Trump announced “Liberation Day” reciprocal tariffs in April, imposing a 26% tariff on Indian goods. A temporary 90-day pause followed to allow negotiations, but talks stalled over market access — particularly for U.S. agricultural and dairy products.

As deadlines were extended and missed, Trump imposed a 25% tariff on India on July 31, followed by another 25% “penalty” tariff for India’s continued import of Russian oil. At 50%, the tariff effectively priced Indian goods out of the U.S. market.

Export Sectors Under Strain

The tariff shock hit labour-intensive sectors hardest — textiles, apparel, leather and engineering goods — for which the U.S. is a major destination. Orders slowed, margins shrank, and exporters faced rising uncertainty.

The government announced an Export Promotion Mission to offer cheaper credit and help firms overcome non-tariff barriers, but operational details remain unclear. For many exporters, relief has been slower than the damage.

Growth Outlook: Slower Second Half Ahead

Looking ahead, the Reserve Bank of India has projected GDP growth of 7.3% for 2025–26. This implies a slowdown in the second half of the year, given that growth averaged around 8% in the first half.

Tariff-related uncertainty is likely to persist into early 2026, clouding export prospects. At the same time, domestic demand will depend on how effectively tax relief, GST rationalisation and labour reforms translate into higher spending and investment.

A Quiet but Important Reset in Economic Data

One underappreciated positive lies in statistical reform. India will update the base years for GDP, the Index of Industrial Production and the Consumer Price Index — all crucial indicators for policy and markets.

Improved methodologies and more recent base years should offer a clearer picture of the economy’s true structure and performance, aiding better policy decisions in the years ahead.

A Year of Partial Gains and Unfinished Business

In sum, 2025 delivered meaningful domestic reforms and notable trade successes beyond the U.S. But these gains were offset by external shocks — especially American protectionism — that exposed India’s export vulnerabilities.

As the economy enters 2026, the challenge will be to consolidate internal reforms, diversify trade partnerships, and reduce dependence on any single market. The foundations have been strengthened in parts, but sustaining momentum will require navigating an increasingly uncertain global economic order.