Outlook of Indian Economy

• 28 Jul 2025

For Prelims: Reserve Bank of India, Consumer Price Index,  Inflation, Current Account Deficit, Gross fiscal deficit , Foreign Portfolio Investment 

For Mains: State of the Indian economy and macroeconomic indicators, Inflation and fiscal discipline, State finances 

Source: IE

Why in News?

The Reserve Bank of India's  article titled “State of the Economy” offers a cautiously optimistic view of the Indian economy, amid global and trade-related uncertainties. 

What is India's Present State of the Economy?  

• Inflation: Retail inflation (measured by the Consumer Price Index (CPI) fell from 5.4% in 2023–24 to 2.1% in June 2025, the lowest since January 2019. 
  • In June 2025, core inflationrose to 4.4% due to costlier personal care, education, and recreation, while overall inflation eased more sharply in rural (1.7%) than urban areas (2.6%). 
• Balance of Payments: India recorded a current account surplus  of 1.3% of Gross Domestic Product (GDP) in Q4 2024–25.  
  • India’s  Current Account Deficit  narrowed to 0.7% of GDP in FY24.  
• Fiscal Developments: Gross fiscal deficit (GFD) stood at 0.8% of its 2025-26 budget estimates, a significant improvement from 3.1% in 2024-25  
  • Till May 2025, the Centre received 21% of Budget Estimates (BE) 2025-26 of Total Receipts. Total expenditure stood at 14.7% of FY26 BE, with a notable focus on capital expenditure. 
• Trade Performance:  India’s overall trade deficit narrowed nearly 30% in May 2025, mainly due to falling oil prices and strong services exports.  
  • Compared to May 2024, total exports in May 2025 grew by 2.8% boosted by a 9.4% rise in services exports, while total imports fell by 1%. 
  • India’s export performance in FY 2024–25 was driven by strong growth in sectors like coffee, tobacco, electronic goods, rice, and drugs & pharmaceuticals.  
    • Other sectors such as ready-made garments (RMG) of textiles, plastic & linoleum, engineering goods, and fruits & vegetables also saw positive growth.  
  • The US, UK, Japan, UAE, and France emerged as top export destinations during the year.  
  • On the import front, major sources included UAE, China, Thailand, US, and Russia.  
• Foreign Direct Investment (FDI): FDI inflows up 14% in FY25 from FY24, and 125% higher than FY14. 
  • The services sector led with 19% of equity inflows, followed by software & hardware (16%) and trading (8%).  
  • Manufacturing FDI rose by 18% in FY25 compared to FY24, Maharashtra topped with 39% of inflows, while Singapore was the largest source (30%), followed by Mauritius and the US. 
• Foreign Portfolio Investment (FPI): India witnessed positive net Foreign Portfolio Investment (FPI) inflows of USD 44.1 billion in FY24. 
• External Debt: India's external debt rose by 10% in 2025 compared to 2024, with the debt-to-GDP ratio rose slightly to 19.1% from 18.5% FY24. 
• Foreign Exchange Reserves: India's foreign exchange reserves stood at USD 696 billion as of July 2025, covering over 11 months of goods imports and 95% of external debt. 

What are the Factors Affecting the Indian Economy at Present? 

• Global Headwinds: 
  • Geopolitical and Trade Tensions: Ongoing Iran-Israel tensions and uncertainty around US tariff policies are keeping the global environment unstable.  
    • Global tariff rates may rise to levels last seen in the 1930s, which could raise India’s import costs and worsen inflation. 
  • Weak Global Confidence: Consumer and business sentiment remains subdued worldwide, slowing the pace of global recovery.  
    • This reduces demand for Indian exports, especially in sectors like manufacturing and IT services. 
  • Sticky Global Inflation: Inflation has increased in advanced economies and remains elevated in emerging markets like Brazil and Russia.  
    • This may lead to tighter global monetary policy, which can restrict foreign capital flows into India and increase borrowing costs. 
• Domestic Activity: 
  • Industrial Slowdown: Growth in the Index of Industrial Production (IIP) fell to 1.2% in May 2025, the lowest since August 2024.  
    • This hampers job creation and weakens momentum in industrial and manufacturing sectors. 
  • Drop in Credit Growth: Bank credit to Non-Banking Financial Companies (NBFCs) and industry declined.  
    • NBFC loan disbursals dropped 13% year-on-year in the September 2024 quarter. Urban loan sanctions fell 23%, and long-term loans dropped by 50%.  
    • Loans against securities and education loans also saw sharp declines. This curbs business investment and slows economic expansion. 
  • Slower GST Revenue Growth: Goods and Services Tax (GST) collections grew by only about 6% in June 2025, the slowest pace in four years.  
    • This suggests weakening demand, a cautious business sentiment, and adds pressure on government finances. 
  • Labour Market Strain: While unemployment remained steady at 5.6% in June 2025, rural labour force participation declined due to the agricultural lean season and extreme heat.  
    • This signals stress in rural employment, which can hurt rural consumption and overall demand. 
  • State Finances: States face rising subsidy burdens from loan waivers and free services, which strain finances and divert funds from infrastructure.  

Way Forward 

• Fast-track Trade Deals: Expedite FTAs with key partners like the US  to cushion against tariff hikes and open new markets. 
  • Invest in export infrastructure, port efficiency, and quality certification to help Indian goods compete globally. 
• Boost Rural Demand and Job Creation: Expand rural employment programs during lean agricultural seasons and heatwaves. 
  • Shift focus from just transfers to rural skilling and non-farm livelihood support, especially for youth and women. Improve irrigation, cold storage, and market linkages to make farming more resilient. 
• Maintain Macro Stability While Supporting Growth: Control inflation through supply-side steps while sticking to the fiscal glide path.  
  • Keep policies stable and investor-friendly to ensure capital flows. Use forex reserves to support essential imports like energy and tech.

Conclusion 

India needs disciplined, steady, and state-led execution. Balancing welfare with investment, and exports with domestic demand, will be key to turning current challenges into a long-term growth opportunity. 

UPSC Civil Services Examination, Previous Year Questions (PYQs)  

Prelims

Q. In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight? (2015)

(a) Coal production  

(b) Electricity generation  

(c) Fertilizer production  

(d) Steel production  

Ans: (b) 

Q. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if: (2018)

(a) Industrial output fails to keep pace with agricultural output.  

(b) Agricultural output fails to keep pace with industrial output  

(c) Poverty and unemployment increase.  

(d) Imports grow faster than exports.  

Ans: (c)  

Q. In a given year in India, official poverty lines are higher in some States than in others because: (2019)

(a) Poverty rates vary from State to State  

(b) Price levels vary from State to State  

(c) Gross State Product varies from State to State  

(d) Quality of public distribution varies from State to State 

Ans: (b) 

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Mains

Q. Do you agree that Indian economy has recently experienced V–shaped recovery? Give reasons in support of their answer. (2021)

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (2019)

Q. “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy capable of increasing the industrial growth rate? (2017)