A lot to cheer for the Indian Economy in 2025, but rupee, jobs and exports remain a concern
NEW DELHI : Indian Economy, 2025 was all about fighting many macroeconomic baddies. While key indicators like exports and currency depreciation had the country in a chokehold, a robust growth rate of 8% in the first half of the fiscal was like a gift from a higher power.
We survived external and domestic setbacks such as US tariffs that threw markets and trade into turmoil, uneven private investment, unemployment, dips in manufacturing and mining activity, weak domestic demand, and above all, a fragmenting global economy reshaped by wars, and changing supply-chain dynamics.
On balance, the Indian economy coursed through the currents with a serenity that would have done a wise man proud.
Growth
India remains the fastest-growing Asian economy, with the IMF raising its forecast to 6.7%-6.9% for FY26 and 6.5%-6.9% in FY27. The recent personal income tax reductions, an accommodative monetary policy, ongoing GST reforms, and a possible trade deal with the US are expected to lift both hearts and hopes in the coming quarters.
While the headline numbers appear wholesome, growth is not broad-based as it should be. Private consumption and investments need a turnaround and economists warn that growth could slow in the second half owing to a high base effect, the impact of US tariffs and softening global demand.
Sectorally too, while the agricultural sector is holding promise, industrial output needs to be better. Manufacturing and mining activity particularly must gain pace, which in turn can create jobs and attract investments.
As the IMF noted, private investments remain uneven and sluggish, while growth is being fuelled by government investment, which has surged 40% so far this fiscal. In fact, the Indian economy’s endless wait for the private investment cycle to kickstart is much like Titanic’s enduring romance against the odds.
Both the IMF and RBI insist that manufacturing, construction and public capital expenditure act as key growth drivers, while government infrastructure spending, and investments in sectors such as electronics, automobiles and renewables can rebalance from consumption-led growth to investment-led expansion.
But private capex is stuck at 12% of GDP for over a decade. Of the total investments, private capex’s share fell to 34.4% in FY24, the lowest since FY12. Government data also shows that new private capex investment intentions for FY26 stood at Rs 4.89 lakh crore, down 26% over the previous year.
Likewise, as the RBI survey shows, capacity utilisation in the manufacturing sector is struggling to break past 75%. In the 53 quarters since the start of 2012-13, capacity utilisation exceeded 75% on just 10 occasions.
What we actually need is all-round performance of key components including agriculture, industry and services on the supply-side and private consumption, investments, public expenditure and exports on the expenditure side. Put another way, it’s like the Infinity Stones in Avengers films. Only when all the Stones are fully powered does the user get complete control to rule the universe.
Rupee’s descent
The Indian currency is behaving as though it’s mounted on a Ferris wheel that’s spinning uncontrollably.
It started the year at 85.64 and took just 15 trading sessions to cross 91, owing to trade tensions, and persistent capital outflows. As if falling to fresh historic lows, and emerging as Asia’s worst-performing currency isn’t enough, the domestic unit is expected to touch 92 in next three months.
Worse, the rupee’s weakness is not limited to the US dollar alone. It has slipped against other major currencies as well. The Nominal Effective Exchange Rate (NEER), or the weighted average of the rupee’s exchange rate against 40 key trading partners, fell about 8% as of October. Likewise, the Real Effective Exchange Rate (REER), which adjusts NEER to inflation, too fell nearly 9.9%, indicating that the rupee’s depreciation is not just a nominal adjustment but an erosion of purchasing power.
The key reason for the fall in the rupee is not India’s current account deficit (CAD), which is behaving rather obediently. Until there’s a reversal of foreign capital outflows, the rupee may continue to plumb lower depths.
That said, the current decline cannot be compared with the 2013 episode, when the domestic currency survived one of the toughest phases, according to Kotak Securities. As investors rushed out of emerging markets, India was hit the hardest because our economy was already weak and placed in the Fragile Five, inflation was high, CAD stood at 4.8% of GDP and India was heavily dependent on foreign flows to finance the deficit.
The rupee lost almost 20% of its value, import costs surged, bond yields spiked, and markets turned nervous. Real rates were low, and consumption-led growth had led to a high trade deficit. When the dollar liquidity tap was shut during the taper tantrum, the impact was severe.
According to Kotak, the situation is different this time. Real rates are competitive, growth is robust, inflation is under control, reserves are strong, and services exports cushion the impact on the economy. And as the IMF noted, India’s currency system is crawl-like, where the rupee is allowed to move in small, gradual steps, without sharp shocks.
The RBI’s pragmatic interventions are akin to screw-tightening, and not to defend a particular level. Often, countries face trouble when they run out of dollars. Given India has sufficient dollar cover, the rupee, even at 90, is seen as adjusting rather than collapsing.