OECD Economic Outlook, Volume 2025 Issue 1

India

Real GDP is projected to grow by 6.3% in fiscal year 2025-26 and 6.4% in 2026-27. Private consumption will gradually strengthen, driven by rising real incomes that are helped by moderate inflation, recent tax cuts and a strengthening of the labour market. Investment will be supported by declining interest rates and substantial public capital spending, but higher US tariffs will weigh on exports. Inflation will remain contained at around 4% as economic activity grows around trend. A less benign monsoon season or higher global commodity prices could drive up food prices and inflation.

The Union Budget for the fiscal year 2025–26 foresees a moderate fiscal consolidation, aiming to reduce the headline budget deficit from 4.8% of GDP in fiscal year 2024-25 to 4.4% in 2025-26. With inflation firmly within the target range, monetary policy is gradually expected to become more accommodative. Better targeting of energy and fertiliser subsidies, and an overhaul of tax expenditures, could enhance spending efficiency and free resources for other policy priorities. Improving logistics efficiency, upgrading digital infrastructure, and enhancing policy predictability, particularly in tax administration, could bolster private investment.

Domestic demand supports activity

Real GDP expanded by 6.2% year-on-year in the third quarter of FY2024-25, supported by robust domestic demand and strong investment. High-frequency indicators suggest that economic activity remained solid in the fourth quarter. Industrial production rose by 3.7% year-on-year in the first four months of 2025, with the manufacturing sector regaining strength. India’s current account deficit widened in the first three quarters of FY2024-25, due to a persistent merchandise trade deficit that was only partially offset by strong services exports. More recent data suggest a slight improvement in the trade balance. The labour market was resilient in 2024 with the labour force participation rate increasing to 45.1% and employment continuing to rise. Survey data from early 2025 show optimism in the labour market, especially in sectors such as information technology, retail, and finance.

Monetary conditions remain restrictive, despite policy rate cuts in February and April. Headline inflation eased to 3.2% in April 2025 and is now within the central bank’s target range of 4% ± 2%, largely due to a substantial moderation in food inflation, which accounts for nearly half of the CPI basket, and declining energy prices. Easing food prices reflect a strong autumn harvest, and government interventions, such as export restrictions. As a major oil importer, India has benefited from lower global crude oil prices in recent months, which reduced domestic fuel costs and helped contain input costs in energy-intensive sectors such as transport, manufacturing, and agriculture. While core inflation remains slightly above 4%, wage growth remains moderate. High merchandise export exposure to the United States, which is India’s largest export market, increases the vulnerability of private investment to shifts in trade policy. Tariff increases and broader trade tensions may damp investor sentiment, particularly in export-oriented sectors such as chemicals, textiles, and electronics. However, the overall GDP effects will be limited by the moderate share of exports in GDP, with merchandise exports towards the United States accounting for only 2.1% of GDP.

India 1

1. Year-on-year growth rates. The sum of components may deviate from observed GDP growth because of balancing items, chain-linking procedures and direct/indirect seasonal adjustment methods.

2. Year-on-year growth rates. The shaded area corresponds to the central bank’s inflation tolerance band.

Source: OECD Economic Outlook 117 database; and RBI.

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India: Demand, output and prices

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India 2

Source: OECD Economic Outlook 117 database; and RBI.

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Monetary policy is expected to ease amid rising public investment

The Reserve Bank of India (RBI) began its current easing cycle in February 2025, followed by a second policy rate cut in April. Despite the cumulative 50 basis point reduction, which lowered the policy rate from 6.5% to 6.0%, financial conditions remain tight. Monetary policy is expected to ease further over FY2025–26 as headline inflation remains within the target range over 2025 due to the moderation of food and energy prices, which make up a large share of the consumer price index. Low global commodity prices and a broadly balanced output gap are helping to contain demand-side pressures. In addition, the credibility of the RBI’s inflation-targeting framework continues to anchor inflation expectations. With headline inflation expected to remain within the target range in the following years and inflation expectations projected to remain anchored, there is scope for the central bank to reduce the policy rate towards a more neutral level. A further 25-basis point cut is expected by the end of 2025.

The central government is expected to pursue fiscal consolidation, bringing the budget deficit from 4.8% of GDP in FY 2024-25 to 4.4% in FY 2025-26, with local governments projected to adopt a similar stance. The adjustment relies primarily on higher revenues. Although the recently approved Union Budget includes income tax cuts for middle-income households, overall tax revenues are projected to increase by 0.3% of GDP, partly reflecting the positive impact of tax code simplification and digitalisation on compliance. On the expenditure side, total spending is set to decline by 0.1% of GDP, largely reflecting reduced subsidies. Public capital expenditure and defence spending are maintained at their current levels as a share of GDP.

Private demand will drive growth amid emerging external headwinds

Real GDP is projected to grow by 6.3% in FY2025-26 and 6.4% in FY2026-27. Private consumption is supported by rising real incomes and lower personal income taxes. Investment will remain strong, bolstered by easing financial conditions. However, export growth is expected to slow due to weaker global demand, the impact of higher tariffs and heightened trade policy uncertainty. Headline inflation is projected to average 4.1% in FY2025-26 and 4.0% in FY2026-27. Inflation expectations remain well anchored, and wage pressures are expected to remain contained with the economy projected to grow around potential, suggesting limited demand-driven inflation pressures.

The balance of risks is tilted to the downside. The summer monsoon is projected to be normal. A less benign monsoon would reduce agricultural output and rural incomes, push up food prices, and weigh on GDP. The agricultural sector accounts for over 15% of GDP and employs a large share of the population. Additionally, the risk of increased trade tensions, including the imposition of higher US tariffs on Indian exports, could dampen external demand and harm export-oriented sectors such as textiles, chemicals, and pharmaceuticals. Trade tensions may also discourage private investment in tradable sectors. Stronger-than-expected remittances and investment inflows, coupled with robust infrastructure implementation, could lift growth above current projections.

Fiscal prudence and reforms are important to sustain growth

Phasing out tax expenditures, rationalising subsidies, and expanding tax bases would improve the quality and sustainability of public finances, creating room for expanding social protection, higher public investment, and active labour market policies. Emphasis should be placed on policies that raise labour force participation, especially among women. Although female employment has increased markedly, from 17.5% in FY2017–18 to 31.7% in FY2023–24, strengthening women’s access to formal jobs will require coordinated reforms in childcare availability, safe and affordable transportation, skill-building, and enforcement of workplace protections. India has scope to accelerate trade liberalisation, simplify customs procedures, and reduce tariffs. Further reforms are needed to improve the efficiency of logistics networks, upgrade digital infrastructure, and reduce regulatory uncertainty, especially in tax administration. Enhancing the availability and accessibility of long-term finance, including through deepening capital markets and improving credit access for SMEs, would further strengthen the investment climate.