Indian Economy: Prospects and Challenges

With the overall GDP valued at USD 4. 18 trillion, India has surpassed Japan to become the world’s fourth-largest economy and is poised to displace Germany from the third rank in the next three years with a projected GDP of USD 7.30 trillion by 2030. The growth momentum is a healthy indicator with the GDP expanding to a six-quarter high in the second quarter of 2025-26, reflecting India’s resilience in the midst of persistent global trade uncertainties. Domestic drivers-led by robust private consumption-played a pivotal role in supporting this growth.

Doing a deep dive of the growth indices its quite obvious that 2025 was India’s “Goldilocks Moment” which is a period characterized by high growth and low inflation. As per the ministry of statistics and program implementation, in the second quarter of the Financial year 2025-26, India’s real GDP grew by 8.2%, up from 7.8% in the first quarter and 7.4% in the last quarter of 2024-25. The Reserve Bank of India has revised the growth forecast for 2026-27 to 7.3%, from its earlier estimate of 6.8%.  The key drivers that would fuel the GDP growth are robust domestic demand, rationalization of GST and Income tax, softer crude oil prices and ongoing economic reforms. The other factors that would influence the economic growth are as follows.

Easing Consumer Price Index Inflation:

Consumer price index (CPI) is the change in the price of a basket of goods and services that are typically purchased by specific groups of households. CPI inflation softened to 0.71% in November 2025 from 4.26% in January 2025. In 2025, India experienced an overall benign inflation environment, wherein the general increase in prices is moderate and slow, with an average of 2.5%. Controlling the CPI inflation and maintaining it within the range of 1% and 3% would boost the confidence of corporates to take long term decisions with respect to investment. This would also enable consumers to rationalize heir spending.

Falling Unemployment Rates

According to the ministry of labour and employment the unemployment rate reduced to 4.7% in November 2025 from 5.2% in October 2025, making it the lowest since April 2025. The key challenge for the government in the ensuing financial year would be to maintain the unemployment rate between 3.0 to 4.5%, facilitating the job seekers to find employment without causing inflation in wages.

Trade Performance:

As per the ministry of Trade and Commerce, in January 2025, Indias foreign trade commenced on a solid footing with total exports (merchandise and services combined) valued at $:74.97 billion, registering a growth of 9.2% over January 2025. The cumulative exports in the first quarter of the financial year 2025-26 reached $: 210.31 billion (up by 5.94%) versus same period last year. These early and mid-year trends were clear indicators of steady export expansion and diversified external demand across various sectors.

These early and mid-year trends demonstrated steady export expansion and diversified external demand   However the share of merchandise exports and its growth to the total exports needs to show significant improvement in the next financial year, in order to fuel the overall economic growth. Merchandise exports expanded to US$ 38.13 billion in November, 2025 compared to US$ 36.43 billion in January 2025, with a growth of 4.7%, whereas the service sector exports registered a growth of 8.65%. More focus on broadening the scope of the merchandise exports with impetus on electronic and engineering goods would be the key in this direction. India had broadened its global footprint by strengthening the trade partnerships with countries like United Kingdom, New Zealand, Oman and Jordan recently. Merchandise exports to these markets would play a pivotal role in boosting the nation’s overall foreign trade.

Rationalize Imports:

Concrete and positive policy measures are warranted to rationalize the imports in order to reduce the Current Account Deficit of the nation. Gold which is ideally a non-essential commodity accounts for 13% of the total imports of the country, which is second to Petroleum, which accounts for 31%. While petroleum is a highly essential commodity that meets the nation’s energy needs, gold hardly adds value to the economy. Curbs on the import of gold is highly warranted as it’s a drain on the foreign exchange reserves, resulting in higher current account deficit and weakening of Indian rupee.

                                                                                            

Author is a member of the Loka Kerala Sabha