2025 Recap: India’s GDP Growth Explained

This Article is Written By Saurabh Singh Rathore, Government Law College, Mumbai.

Starting the year with a dramatic Trump tariff war and doubt that India will Indian be able to cope with it? or will it affect India’s economy? The questions were many, and at the end of this year, I think all have been answered

The number tells the story of this year.

According to the PIB data as of December 2025, the macro indicator states that India is doing fine in its economy.

According to current reports, India’s GDP growth is coming in impressively at 7.8% and 8.2% in the first and second quarters of the current fiscal year, respectively.

The CPI inflation dropped to 0.71 per cent in November 2025, the lowest since 2021, from 4.26% in January 2025

And merchandise export expanded to US$38.13 billion in November 2025, compared to US$36.43 billion in January 2025

The unemployment rate is up from 7.8%in Q1 to 7.4% in Q4 of fy 2024 25

Let’s understand the basics

The GDP means the calculation of all the production happening within the domestic territory by both residents and non-residents.

Where the domestic territory includes the –

• political boundary,
• The territorial enclaves located abroad, like embassies, military bases, etc, excluding those of others located in our country ,
• ships and aircraft operated by Indian residents outside Indian,
• and oil and natural gas rigs operated by Indian residents outside India.
• GDP is a flow variable and a territorial concept.

If we simplify GDP, it means how much goods and services are being produced in the country territory to satisfy the wants of the people and to be precise, wants that creates effective demand, which means willingness to pay for that wants, and the increasing demand of the people incentify for more production, and that is when we say the country is growing in the GDP term, that is, production of more goods and services is being made.

The main driver of the growth that is GDP is-

• household consumption,
• government expenditure and investment
• private investment and
• export.

What are the meanings of these term, and what is  the 2025 situation?

household consumption-

• It simply means the total expenditure being made in the economy by the people for goods and services. For example, if someone buys a car, that is an expenditure made in the economy, and for that expenditure, production is being done, and as the consumption increases, that is, people are buying more cars, more production takes place, thus increasing the GDP of the country
• This is also called the consumption-led model of growth
• That is to fulfil more consumption in the economy, more production will take place, more people will acquire jobs, and once more job is created, the money in their hands will motivate them to more consumption, thus repeating the cycle.
• Sometimes the economy is stagnant means people are not doing consumption which resulting in no production and no investment. For any reason, in that case government intervenes to accelerate the consumption ….

Currently

• The consumption was great in 2025 due to the festival season, which was accompanied by the government policies that included the GST rate cut and the income tax benefit, which have made people spend more and consume. Thus, making the household expenditure drive the growth.
• The RBI monetary policy has also played a significant role in the consumption, that is announcement of a 100bps cut Cash Reserve Ratio and a cut in the repo rate by 125bps in the year 2025, which makes people spend more.

Government expenditure

• Government expenditure affects the GDP through consumption and investment.
• Government consumption includes non-market services such as administration, defence, education, and health, which are counted in GDP at their cost of production. It simply means the government is consuming the services, and that the government is producing the services in the economy. And for those services, the government is being paid. That is counted in the GDP. Transfer payments like pensions and interest are excluded. As they do not create output. It generally means that these payments are being made by the government. But it is not creating any good and service in the economy,
• government investment means infrastructure creation directly adds to the GDP’s capital formation and indirectly. Raises employment, productivity and demands.

Currently

• As per PIB data, the GFCE that government final consumption expenditure in terms of contribution to the GDP, that is, the expenditure component, government direct spending on goods and services, shows strongholds in the Q1 of the FY2025 2026. April to June GFCE registered a 9.7%growth rate in nominal terms significant rebound from the previous year’s 4.0%in the same quarter. For FY 2025 2026 Q2, July-September GFC growth was robust, contributing to an overall 8.2% to real GDP growth in that quarter
• and as of FY 2025 and 2026 government had estimated total expenditure of 50.65 lakh crore. This represents a total 7.4% increase over the revised estimates for the previous year, in which the capital expenditure marked 11.21lakh cr, which is approximately 3.1%of GDP
• This is considered a high-quality expenditure as it leads to the creation of long-term assets and most economic capacity
• Government expenditure was front-loaded in the year 2025.

the export

The export being done to another country is also part of the GDP

 The private investment.

• Private investment is one of the pillars of GDP growth, as it creates the formation of goods, which are directly counted in the GDP. A domestic or foreign investor entity can do the private investment
• The investment done by a foreign company is FDI, Foreign Direct Investment, that a foreign company creating a good in the domestic territory of India, which is also counted in the GDP
• Specifically, there are different types of direct investment. The greenfield investment is related to GDP as it involves the creation of a new capital asset. Another type that is brownfield and merger direct investment is not related to GDP, as no new capital good is being formed; only the ownership is transferred of an existing capital good, or the expansion of an existing good is being done
• For example, if any company is doing an investment and creating a 500-cr factory that directly adds to the GDP as the creation of goods
• Note that GDP counts the creation of capital, not the usage of it.
• Indirectly, it leads to an increase in productivity, creating a job and multiplier effect, which leads to GDP growth and is called the investment-led model, where investment is done in capital form, more jobs lead to more consumption, and GDP grows
• These institutions are also dependent on the amount of savings a country has, as the savings are rerouted by the bank to the company for capital formation.

currently

• The private corporate investment has been stagnant at 12 per cent of GDP since 2011

the challenges

• due to high inflation, which means that the current value of currency is eroded and the goods and services are much costlier in short “mehngai” 
• weak purchasing power due to unemployment
• more savings than consumption
• rural distress inequality, which can lead to uneven consumption  

can be a threat to consumption-led growth in all conditions, the consumption of the household is reduced, which affects the GDP growth

Government investment

• Government fiscal debt would hinder government expenditure in capital formation. Fiscal debt means the total liability of the government, which has to be paid, data tell by March 2025. The total liability stands at USD 2.2 trillion of both the central and state combine
• A reduction in revenue would hinder the capital expenditure

Private investment

• The year 2025 has seen foreign portfolio investors pull out a record of $18 billion plus from the Indian market through net sales of equity. This, together with declining foreign direct investments since 2023-2024.
• The FPI means investment in stock, corporate debt securities, government bonds and treasury bonds, and money market instrument units of mutual funds, etc It does not directly affect the GDP, as in FPI, no capital formation is being directly done, but indirectly it does

Affect the GDP of the country, as if investors pull out the money, it reduces the confidence for foreign direct investment in the country, thus affecting the GDP of that country

Export

• The export uncertainty in contemporary geopolitics has definitely affected the economic state of the world and as well as that of India
• The US tariff drastically affects the textile, garments, gems and jewellery industry of India, and With war between Russia and Ukraine has certainly affected the country in a negative way. The additional 25 % tariff for buying Russian oil is certainly not welcome,

The way forward

• The external uncertainty, especially with us, can be managed as India is in the middle of trade talks with the US. Once the agreement is finalised, the us will change its stance on the tariff war.

Secondly, the peace process between Ukraine and Russia is in talks. As of today, the president of the US and Ukraine met, where Zelenskyy said that the us and Ukraine have 90% agreement over 20 20-point peace plan, 100% over the security guarantee, which is a positive sign in over talks.moreover

the government policy has cushioned some effects. In response to the U.S. imposing a 50% tariff on Indian goods, the government is formulating short, medium, and long-term strategies to support exports. This plan includes easing SEZ norms, providing liquidity relief, and building a resilient supply chain. Some saving domestic industry ministries have come forward to help by rerouting the export due to the tariff, which has absolutely cushioned the effect

• In the case of private investment, the global high returns have attracted the private investors and subsequently, with high  AI investment in other country thus making, FPIs have been net sellers in Indian equities. The fall in investment in the debt equity says everything. In debt and other non-equity instruments, they have actually been net buyer to the tune of $7.2 billion so far this calendar year, with more reform in policy and targeting other sectors like the energy sector. Indian can become a global hub for investment

 the reform in policies and further development in other sectors, like the energy sector, etc, can attract the investors with domestic investment

• About consumption, the RBI monetary policy is continuously in a way to control the inflation and balance it with the growth  and Government intervention can be a great way to balance and boost the consumption
• About government expenditure and consumption, the fiscal discipline, like the FRBM policy, could help them manage the funds and reduce the fiscal debt, which will result in more productive expenditure, and the focus should be more on creating an asset, not a liability

The other real challenge,

• No inclusive growth, though the country’s GDP is rising,  in the number only, the concept of an inclusive growth state that is rising GDP is the really benefiting the individual in  that country, which is reflected in the income, quality of education, standard of life, financial inclusion, and gender equality; these tell wheather there is only growth th or inclusive growth

And data tells that the top 10% hold nearly 65% of wealth according to the World Inequality Report 2026, and other data in different spheres state that Indian is lacking in inclusive growth

• Jobless growth. Though the GDP growth is fine, the problem is jobless growth. The AI investment has changed the scenario of how growth and employment go hand in hand. The AI investment is increasing the production and growth of the country, but drastically affecting the labour force of the country.
• Lack of growth in the manufacturing sector, the growth in the agriculture sector is limited, and currently, India is a service-driven economy countributing nearly 55%of the GDP The focus should be on the manufacturing sector as it has more potential to absorb the unemployment of the country, but Indian should learn from the mistakes of china; it should focus on the manufacturing sector but as well as boost domestic consumption, as it should not depend on foreign consumption and  export,  it can led to crisis as contemporary geopolitics is driven by protectionism eg us tariff war

Conclusion

 The upper layer, where the number can be positive, but in the deep layer, the challenges persist and would create a problem once they came to the surface, if not addressed.

The no only should not reflect the growth; if it does, then Indian is the 4^th largest country according to the World Bank, but irony is still most of the people can’t even sustain basic livelihood

Thus, the government, with the help of other institutions, should focus on inclusive growth and a balanced economy. Combining the efforts of all Indians and different institutions, we can become Vishwaguru and Viksit Bharat by 2047 because Indian has a potential

Saurabh Singh Rathore

4^th year law Student at GLC MUMBAI