The Indian economy continues to exhibit strong fundamentals and growth momentum, even as it faces new external challenges. An EY report projects India to emerge as the world's second-largest economy in terms of purchasing power parity (PPP) by 2038, with a projected GDP of USD 34.2 trillion. The report also suggests India could become the third-largest economy in market exchange rate terms by 2028. This optimistic outlook is underpinned by India's high savings and investment rates, favorable demographics, and a sustainable fiscal position.
US Tariffs Pose New Challenge to Indian Exports
A significant development impacting India's business landscape is the imposition of a 50% tariff by the United States on Indian exports, which came into effect on August 27, 2025. This move, reportedly in response to India's purchases of Russian oil, is expected to affect Indian exports worth over $48 billion. Sectors most likely to bear the brunt include textiles, gems and jewellery, shrimp, leather, and micro, small, and medium enterprises (MSMEs).
The Indian Finance Ministry acknowledges that while the immediate impact of these tariffs on exports may appear limited, their secondary and tertiary effects on the economy, particularly concerning supply chains, inflationary trends, and the competitiveness of Indian goods in global markets, pose significant challenges. In response, the Indian government is developing strategies to mitigate the impact, including exploring new markets and enhancing outreach efforts, especially for the affected sectors. Minister of State for External Affairs Kirti Vardhan Singh has affirmed the strength of the Indian economy and industries, stating that the government will not let the country suffer.
Economic Performance and Outlook
India's economy registered a 6.5% growth in FY2025, with a notable 7.4% expansion in the fourth quarter, indicating a stabilization after higher growth rates in the preceding two years. The Reserve Bank of India (RBI) has maintained its real GDP growth forecast for FY2025-26 at 6.5%. Domestic demand remains a key driver, supported by robust consumption, resilient capital markets, and a digitally skilled workforce. Private consumption and investment activity have shown a rebound, aided by easing inflation and early signs of rural recovery.
Furthermore, India's private sector activity recorded its fastest expansion in August, driven by a surge in demand, particularly within the services sector. This growth has allowed firms to implement price hikes at the most aggressive rate in over a decade.
Other Notable Economic Developments
In a notable shift, personal income tax collection has surpassed corporate tax for the first time, reflecting improved compliance, formalization, and digitization within the economy. The National Bank for Financing Infrastructure and Development (NaBFID) plans to secure USD 1 billion from foreign sources in FY26. Meanwhile, GST authorities have uncovered significant tax evasion in the illicit tobacco trade, totaling Rs 104 crore across 61 cases in the first quarter.
Amidst these developments, the Finance Ministry's Monthly Economic Review highlights that despite global tariff pressures, India's economy remains steady due to strong domestic demand and macroeconomic fundamentals. The government is proactively managing risks and pursuing a diversified trade strategy, including ongoing Free Trade Agreement (FTA) negotiations with partners like the US, EU, New Zealand, Chile, and Peru, to ensure sustained trade performance.