A lot to cheer for the Indian economy in 2025, but rupee, jobs and exports remain a concern

Trade deal

When trade talks began early this year, a pact with Washington seemed like a matter of time. It was billed as a ‘big deal’, and so on, but time proved that you can’t always believe what you hear.

With India refusing to toe the Trump line to lay a welcome mat for US imports, particularly agri products, besides reducing reliance on cheap Russian oil, the country’s exports are facing a steep tariff of 50%. This is among the highest levies globally, compared with an effective tariff of about 16% on Asean economies.

The tariffs came into effect in August. Subsequently, India’s exports to the US fell nearly 12% in September and 8.5% in October, though they rebounded sharply in November, rising 22.6%. On balance, India’s exports to the US are up 10.1% till October, driven largely by substantial front-loading of shipments when tariffs were lower. However, sectors such as gems and jewellery, textiles, apparel, agriculture, impacted by tariffs recorded a 34% y-o-y decline. If a trade agreement is not reached, these pressures may further weigh on the CAD, noted SBI Research.

The good news is, brokerages and consulting firms expect the India-US trade deal to be concluded in the next six months. If it happens, it’s as good as gaining a thousand soldiers and horses during a battle.

Jobs

While India has seen strong economic growth, and liberalisation, unemployment remains a key policy concern. According to the Economic Survey 2023-24, India must create 7.85 million non-farm jobs annually till 2030 to keep pace with its growing workforce. Private forecasts peg the need for at least another 10 million jobs every year in the formal sector.

The unemployment rate fell from 6% in 2017-18 to 3.2% in 2023-24. While 1.56 crore women have joined the formal workforce in the past seven years, youth unemployment rate fell from 17.8% to 10.2% between 2017-18 and 2023-24, below the global average of 13.3% as per the ILO’s World Employment and Social Outlook 2024.

Sectoral trends from the April-June 2025 quarter reveal that agriculture remains dominant in rural areas, employing 44.6% of men and 70.9% of women, while the tertiary sector leads in urban employment with 60.6% of men and 64.9% of women. Overall, 56.4 crore people aged 15 and above were employed during this quarter, comprising 39.7 crore men and 16.7 crore women.

As one of the fastest-growing economies, India is poised to supply nearly two-thirds of new workforce entrants globally in the coming years, as per the World Economic Forum’s Future of Jobs Report 2025.

Inflation and interest rates

If there’s one thing to be chipper and upbeat about, it’s softening inflation and interest rates. Interestingly, the path for both rates and prices remains decidedly downward.

Retail inflation fell to a record-low of 0.25% in October — the sharpest correction in recent times. In fact, for the first time since the start of the Flexible Inflation Targeting regime, average headline inflation registered 1.7% in Q2, breaching the lower tolerance threshold of 2%. While Q3 print is estimated at 0.6%, which perhaps could be another all-time low, Q4 inflation will likely rise to 2.9%.

As for rates, RBI reduced the repo rate four times in just nine months from 6.5% to 5.25%, with Governor Sanjay Malhotra pointing to a rare Goldilocks phase — benign inflation at 2.2% alongside 8% growth in the first half of the fiscal year — keeping the economy going.

IPO boom-FPI outflows

Notwithstanding global macroeconomic uncertainties and domestic challenges, fresh public offerings in India are in the middle of engineering their own Tom Cruise stunt, defying physical limits.

Between October 2024 and September 2025, 86 IPOs raised nearly Rs 1.71 lakh crore, almost double the previous year, while the Sensex and Nifty delivered barely single-digit returns.

On the other hand, Foreign Portfolio Investors (FPIs) are exiting in truckloads, having withdrawn a record $18.5 billion in Indian equities so far in 2025. Global investors have been bearish on India for most part of 2025, with net outflows of over $10 billion across investment classes so far this year, data from securities depository NSDL shows.

Stock markets view the FPI exodus as an undignified spectacle. Nifty underperformed many Asian peers with roughly 4-6% gains in 2025, even as domestic investors provided ample support, while major indices went from optimism to underperformance. While large caps retained their poise with 8-9% gains, mid caps were under pressure delivering barely 1%, while small-caps saw a 9% decline.

It’s unclear if FPIs will make a comeback on their own. However, a mutually-beneficial trade deal with the US and better economic output has the potential to turn bad guys into good guys in a sequel, ie, in 2026.

Exports

India’s goods and services exports are, perhaps, driving home the point that they won’t be diminished by bullet wounds or beat-downs.

As data released by the Ministry of Commerce & Industry show, during April-November, total exports stood at $562.13 billion, 5.43% higher than $533.16 billion recorded during the same period a year ago. Merchandise exports rose from $284.60 billion to $292 billion in the first eight months of 2025-26.

However, goods exports are expected to be hit in the second half of the current fiscal, owing to steep US tariffs and weak global demand. In fact, exports to the US, while still growing 13% y-o-y to $45 billion, showed signs of slowdown in September, with shipments declining around 12% compared to the previous year. Worse, the situation is unlikely to get any better next year, despite a push for free trade deals with multiple countries.

Still, goods and services exports are likely to grow by 3% to $850 billion this fiscal, according to think tank GTRI. It, however, warned that exports will face a tougher road in 2026. Particularly, goods exports will likely stay flat, while services exports may inch past $400 billion, lifting total exports.

At $850 billion, they fall short of the government’s target of $1 trillion, despite the push for free trade deals with multiple countries. That said, services exports are witnessing robust growth and will likely offset merchandise-trade headwinds.