India has achieved a significant economic milestone by becoming the world's fourth-largest economy with a GDP of $4.18 trillion, surpassing Japan in the global rankings. The country is now positioned to overtake Germany and claim the third spot by 2030, cementing its status as the world's fastest-growing major economy. This remarkable performance has created what analysts describe as a rare 'Goldilocks' macroeconomic environment, characterized by high growth coupled with low inflation.

Exceptional Q2 Performance Drives Growth Optimism

India's economy demonstrated exceptional strength in the July-September quarter of FY25, expanding by 8.2% and marking the fastest growth in six quarters. This robust performance was primarily driven by strong manufacturing and services output, significantly exceeding expectations and previous quarters.

The 8.2% growth rate exceeded even sophisticated economic estimates, prompting Chief Economic Advisor V Anantha Nageswaran to announce that India's full-year economic growth projection would likely be revised upward to 7% or higher from the current estimate of 6.5%.

Upward Revisions Across Economic Forecasts

The strong Q2 performance has triggered widespread upward revisions in growth forecasts from multiple institutions. The Reserve Bank of India's Monetary Policy Committee raised its FY26 economic growth estimate to 7.3% from 6.8% earlier, while most economists and brokerages project India's GDP growth for FY26 above 6.9%.

Fitch Ratings specifically raised its forecast for India's GDP growth for FY26 to 6.9% from 6.5%, citing robust domestic demand and expecting strong consumer spending along with looser financial conditions to support investment.

Structural Factors Supporting Long-term Growth

According to Neelkanth Mishra, Chief Economist at Axis Bank and Head of Global Research at Axis Capital, India's growth trajectory for FY27 is expected to remain above trend. The projected 7.5% real GDP growth for FY27 will be driven by several key factors:

• Structural and regulatory reforms
• Lower borrowing costs
• Accelerated capital formation
• Cyclical boost from policy easing
• More moderate fiscal headwinds
• Monetary easing providing tailwinds

The robust domestic demand, supportive interest rates, tax cuts, and strong government spending have collectively contributed to this decadal high GDP growth performance.

Historic Disinflation Creates Favorable Conditions

India is experiencing significant disinflation alongside strong growth, creating ideal economic conditions. The RBI's monetary policy panel significantly lowered the overall inflation projection for FY26 to 2% from 2.6% estimated earlier as the economy continues to witness rapid disinflation.

The October inflation rate of 0.25% marked a historic low since the Consumer Price Index series was introduced. Axis Bank forecasts that FY27 headline inflation will average 4%, meeting the RBI's target. The median inflation has remained stable near 3% for 18 months, signaling persistent economic slack.

Economic Outlook and Future Projections

Several positive indicators support the optimistic economic outlook. The unemployment rate decreased to 4.7% in November from 5.2% in October, reaching the lowest level since April. The nominal GDP grew 8.7% compared to 8.3% in the year-ago period, while lower inflation has narrowed the gap between nominal and real growth.

Axis Bank expects the current account deficit to widen slightly to 1.2% of GDP in FY26 and 1.3% in FY27, while the surge in capital outflows seen in Q2/Q3 of FY26 is expected to abate. HDFC Bank's principal economist Sakshi Gupta suggests that consumer tax cuts and ample food supply could lead to inflation averaging below 3% for the remaining fiscal year, potentially providing room for additional RBI rate cuts if growth momentum slows post-festive season.

Chief Economic Advisor V Anantha Nageswaran indicated that India's economy is expected to cross the $4 trillion mark in the current fiscal year, representing another significant milestone in the country's economic journey toward becoming a global economic powerhouse.

India's foreign policy landscape in 2025 emerged as a complex exercise in crisis management, marked by the nation's efforts to preserve strategic autonomy while navigating tariff shocks, regional tensions, and pressure from global powers. The year presented unprecedented challenges that tested India's diplomatic flexibility and economic resilience in an increasingly transactional international order.

US Trade Relations: From Optimism to Crisis

The year began with considerable optimism regarding India-US relations under President Donald Trump's second term, with India's participation in an early Quad meeting signaling continued strategic partnership. However, this optimism rapidly deteriorated following Trump's announcement of reciprocal tariffs in April, culminating in the imposition of 50% tariffs on Indian exports.

This punitive measure left India facing higher US tariffs than China, effectively reversing two decades of carefully constructed bilateral ties. The decision represented a severe blow to a partnership that had been strengthened by shared strategic concerns, particularly regarding China's regional influence.

Strategic Trade Diversification Initiative

In response to US trade volatility, India pursued an aggressive diversification strategy, successfully finalizing comprehensive economic agreements with three key partners. These deals represent India's attempt to hedge against US market uncertainties while demonstrating alternative partnership options.

Key Trade Agreement Details

The India-UK Comprehensive Economic and Trade Agreement includes specific provisions for reducing whisky tariffs from 150% to 75%, with further reductions to 40% planned over time. Additionally, the European Union approved 102 new Indian fishery units for export in September, raising the total number of EU-cleared establishments to 604, partially offsetting marine export losses.

China Relations: Cautious Diplomatic Thaw

India took measured steps toward stabilizing relations with China in 2025, despite persistent mistrust over disputed border territories. The most significant development occurred during the Shanghai Cooperation Organisation summit in August, where Prime Minister Narendra Modi and Chinese President Xi Jinping met for the first time in seven years.

Both leaders publicly characterized their nations as "development partners and not rivals," signaling an attempt to move beyond the post-2020 diplomatic freeze. Confidence-building measures implemented during the year included:

• Resumption of direct flights between the two countries
• Reopening of the Kailash Manasarovar pilgrimage route
• Gradual revival of people-to-people exchanges
• Military disengagement along disputed border areas

However, significant frictions persisted throughout the year. Beijing maintained close coordination with Pakistan following the April terror attack in Pahalgam and later detained two Indian travelers while reiterating territorial claims over Arunachal Pradesh.

Russia Partnership: Energy Security Balancing Act

India's relationship with Russia in 2025 exemplified the delicate balancing act central to its foreign policy approach. The partnership centered on sustained discounted oil imports, with Russia becoming India's largest crude oil supplier.

President Vladimir Putin's visit to India in December resulted in commitments for "uninterrupted" oil shipping, with both countries describing their partnership as "resilient to external pressure." This relationship provided India with crucial energy security while maintaining independence from Western sanctions regimes.

Economic Policy Challenges and Future Outlook

Despite trade diversification efforts, analysts caution that new free trade agreements cannot fully replace the scale of the US market. Former Commerce Secretary Anup Wadhawan emphasized that "the single-pointed issue that needs to be addressed is to make India more business-friendly," suggesting that domestic economic reforms remain crucial for long-term growth and competitiveness.

As geopolitical competition intensifies and tolerance for strategic ambiguity diminishes, India's ability to manage parallel relationships without formal alignment will continue defining its foreign policy effectiveness. The nation's 2025 experience demonstrates both the challenges and opportunities inherent in maintaining strategic autonomy in an increasingly polarized global environment.