INDIAN ECONOMY: GROWTH, GST AND STATE OF AFFAIRS

How any change in tax rate can impact any economy and industrial production positively is best demonstrated by recent rate rationalization exercise in India. The lowering of GST rates in September, 2025 worked so much so that it spurred domestic consumption which drived the growth in Q2 of 2025-26. This supported liquidity of Indian consumers along with interest rates and Income Tax rates reduction earlier this year. In Indian economy, domestic demand for goods is considered as a key driver to the present spur in the economic growth.

The growth has been driven by fiscal consolidation, strong public investment and reforms which have together driven productivity and has also improved ease of doing business. It is expected that while geo-political risks will continue to pass a shadow on big cross boarder capital flows and domestic investments, our economy still stands out tall in otherwise present uncertain environment globally.

RBI view for October, 2025

RBI bulletin for October, 2025 reveals that GST collections improved indicating strong pick-up in demand. High frequency indicators for October, 2025 also hint at a broader uptick in manufacturing activities and boost in services sector. This indicates a resilient economic outlook. Not only this, all these factors would also boost India’s Q3 growth which is again likely to surprise.

According to Reserve Bank of India’s view, Indian economy is now turning out to be more resilient to external reasons. This appears to be so after US tariff and GST rate reforms. Various performance indicators have been robust in October – November, 2025 with spending / consumptions going up on lower GST rates. There is an expansion in manufacturing activities with lower inflation affected by GST rate cuts.

MoF review for October, 2025

Ministry of Finance in its October, 2025 review states that easing of inflation and tax reforms have increased household disposable incomes and strengthened near terms consumption Patterns. While retail inflation stood at just 0.25% in October, 2025 (1.4% September, 2025), growth got a boost. It can be said that overall, Indian economy has entered into second half of 2025-26 on a strong footing of lowest inflation, higher domestic consumption and conducive policy frame work, despite global geo-political economic tensions and steep US tariffs. In fact, Indian service exports are at a highest level. Corporate performance too was favourably impacted.

While India’s GDP growth of 8.2% in Q2 of FY 2026 is a pleasant surprise, more so in post US-tariff pressure, it also reflects India’s strength to face hard challenges and its ability to handle tough economic situations.

Economic State of Affairs

• Fastest growing major economy of the world
• GDP growth in Q2 of FY 2025-26 is 8.2% on YoY basis. Normal GDP growth @ 8.7%
• Inflation is at its lowest and is negligible 0.25% (almost zero). Wholesale price index was 0.2% only against 1.8% last year.
• Investment GDP ratio has gone upto 3.4%
• Manufacture grew by 9%, agriculture 3.5% and services 5.2% in Q2 of current fiscal.

Apart from numbers, one can witness the reforms it is backing and the inherent strengths in all sectors. Agriculture grew by 3.5% amid climate uncertainty, manufacture grew by 9.1% and industry recorded impressive growth of 7.7%, just double than FY 2025 and services topped the growth with 9.2% with financial, real estate and professional services recording a growth of 10.2%. Not only the figures are impressive, the GDP growth of 8.2% is much higher than the 6.6% growth estimate of IMF. In fact the growth of 8.2% has come in one of the most difficult global economic times. It is likes that IMF would do an upward revision of its growth projection in near future.

The growth engines

• Lower transaction costs due to wide and robust digital infrastructure
• Fiscal discipline
• Higher asset monetization
• Expansion in domestic demand due to GST reforms
• US tariff management by government / trade and commence
• Lowest ever inflation
• Better infrastructure – road, ports, railways
• Higher public capital infrastructure
• Stable economic and commerce policies
• Higher global capital inflows with more PEs and VC funds
• New production horizons such as defence, space, nuclear power etc.
• Major consumption push in goods
• Impressive growth in agriculture (more than double) and double digit growth in financial / real estate / professional services
• Improved productivity.
• Improved credit of take in Q3 expected.

The Asian Development Bank (ADB) has raised India’s growth forecast for FY 2025-26 to 7.2% from 6.5% and projected 6.5% to be for 2026-27, citing stronger than expected Q2 performance driven by robust domestic consumption and GST rate cuts. Also, growth is likely to be moderate in H2 of the current fiscal. This growth projection is the highest after Vietnam (7.4% for 2026). Global economic growth is around 3.2% only. India’s risks are now balanced with downside risks emanating from trade tension and weather uncertainty while US tariff relief could bring an upward effect.

India’s GDP growth projections

India’s revised GDP growth forecasts by various agencies are now in range of 7% plus for the current fiscal of 2025-26, viz.,

RBI                             -           7.3%

ADB                           -           7.2%

CRISIL                       -           7.0%

Fitch Ratings             -           7.4%

SBI Research             -           7.6%

According to Indian FM, India continues to be the one of the fastest growing major economy globally. Indian economy’s growth has become more broad based over last decade. Sustained investment and various structural reforms have helped in strengthening the economy. The FM has also expressed in Parliament that our economy has shifted from state of ‘fragility’ to ‘fortitude’. It also moved from external vulnerability to external resilience as its debt to GDP ratio is likely to be achieved at 56.1% in 2015-26.

According to new projections, India’s economic growth may exceed 7% for 2025-26 with GDP post four trillion, keeping 8.2% growth in mind. It may also be noted that Economic Survey 2024-25 had projected a growth of 6.3%-6.8% only for FY 2025-26. The present situation reveals that the growth numbers speak of confluence of stable inflation, various reforms measures and sustained public investment fighting the challenges.

Despite US tariff issue, global trade pressures are now somewhat moderated due to diversified trade strategy, new trade deals and new free trade agreements with new markets. Rightly said, if India were a dead economy (as stated by US President), it would not be the world’s fastest growing major economy.