Indian Domestic Economic Policy - Newspaper Summary

 The sources illustrate that in September 2025, the Indian domestic economy is characterized by robust demand-driven growth facilitated by proactive fiscal policy, yet simultaneously constrained by lingering structural issues and severe external shocks from the global landscape, particularly from the US.

1. Domestic Economic Resilience and Growth

India's economic fundamentals are strong, positioning the country for steady expansion despite external volatility.

GDP and Growth Forecasts

• India's credit profile benefits from its strong growth potential, underpinned by a large domestic market and favorable demographics.
• The economy’s growth path appears to be on a steady incline.
• The Q1 FY26 GDP print was significantly firmer than expected, accelerating to a five-quarter high of 7.8% (up from 7.4% in Q4 FY25).
• Rating agency Icra revised its FY26 GDP growth forecast upwards to 6.5% (from 6.0%). Moody's Ratings projected economic growth to be sustained at 6.5% in FY26.
• The Indian economy’s strong domestic financing base for ongoing fiscal deficits and its demand-driven expansion help insulate it from external shocks.

Policy Drivers: Fiscal Stimulus and Consumption Surge

Recent government policy actions are intentionally aimed at boosting domestic consumption:

• GST Rate Cuts (GST 2.0): The consolidation of GST rates was announced in September, providing a significant fiscal stimulus. These cuts are expected to "turbo-charge sentiment" and kickstart consumption.
  • The GST cuts spurred a massive spike in sales in the consumer durables and electronics sectors due to pent-up demand.
  • The auto market saw an immediate effect, with major manufacturers reporting record sales and enquiries on the first day of the new GST regime, leading to a 50% jump in demand for small cars.
  • The annualised impact of the GST cuts on GDP could be 0.6–0.7 per cent.
  • A large part of the resulting gain to consumers is expected to be spent on additional goods and services or on uptrading to premium options.
• Income Tax Relief: Income tax thresholds were increased in the recent budget, eliminating direct tax liabilities for many lower-to-middle-income households, further supporting urban consumption.
• Government Capital Expenditure (Capex): Strong GDP growth in Q1 was aided by a 52% year-on-year surge in the Government of India’s capex. Continued government expenditure is expected to support capital and infrastructure goods production.

2. Monetary Policy Stance and Inflation Management

The Reserve Bank of India (RBI) is in an "enviable dilemma" due to synchronized low inflation and steady growth.

• Inflation Control: Inflation has remained benign, with average CPI inflation for FY26 likely to print around 2.6%. The GST rejig alone is expected to dampen headline CPI prints by 25–50 basis points (bps) through Q3 FY26 to Q2 FY27.
• Rate Decision (October Policy): Despite the low inflation outlook (sub-3% inflation for FY26), the Monetary Policy Committee (MPC) might opt for a status quo (policy pause) on the repo rate.
  • A pause preserves flexibility amid evolving growth risks and external uncertainty related to US tariffs.
  • Some experts argue for a pre-emptive quarter-percentage-point rate cut to support economic expansion before the effects of US tariffs materialize and to back the government’s fiscal stimulus with a monetary one.
  • Ultimately, policymakers suggest that providing clear and credible forward guidance on potential future easing would be more effective in calming market nerves than an immediate rate cut.
• Liquidity Management: The RBI is urged to shift focus beyond just the policy rate to managing systemic liquidity. Durable liquidity is expected to drain down towards ₹1.5 trillion by the end of FY26 from current levels of around ₹5 trillion, requiring the RBI to be agile with proactive intervention to avert a potential credit squeeze.
• Monetary Transmission Impediments: The benefits of monetary easing are being limited by adverse sentiment in the bond market, driven by escalating risks of fiscal slippage and concerns about additional government debt supply.

3. Structural Policy Reforms and Weaknesses

The policy focus extends to deeper structural issues, particularly regarding capital flows and regulation.

Boosting FDI and Ease of Business

• The government is planning to simplify Foreign Direct Investment (FDI) processes by reducing red tape and making rules more investor-friendly. This effort is spearheaded by the Department for Promotion of Industry and Internal Trade (DPIIT).
• Current hurdles include complex approval and reporting processes requiring investors to fill multiple forms (e.g., Form FC-GPR, FC-TRS, FLA return) across different portals. The Centre may consolidate forms and synchronize processes.
• FDI is deemed crucial as it brings essential capital, technology, and expertise to fuel economic growth. However, FDI growth slowed recently, rising 15% in Q1 FY26, lower than the 47.8% growth in the previous year's Q1.

Regulatory and Fiscal Challenges

• Fiscal Weakness: Despite strong growth, Moody's noted that recent fiscal measures (income tax relief, GST consolidation) that reinforce private consumption will erode the government’s revenue base. This limits potential improvements in debt affordability and could impede progress toward debt reduction.
• Poverty and Disparities: A report published in the RBI Bulletin noted a significant decline in poverty between 2010-11 and 2022-23, with poor states catching up in consumption. However, industrialised states like Maharashtra still show high poverty incidence (9.95%), indicating that high aggregate wealth does not equate to equitable poverty reduction.
• Inverted GST Structure: Specific GST changes created problems for some industries. The Exercise Book Manufacturers Association raised concerns that the reduction of GST on books/notebooks to zero, coupled with an increase on paper and paper boards to 18%, created an inverted duty structure. This blocks input tax credit (ITC) and is expected to raise notebook retail prices by 15–20%, potentially increasing imports and hurting MSME domestic manufacturers.
• GST Dispute in Oil/Gas: FICCI expressed distress over the hike of GST on capital goods for petroleum and Coal Bed Methane (CBM) operations to 18% (up from 0% under the previous VAT regime). This is seen as a disruption of E&P contracts that guaranteed zero taxes on local purchases, raising project costs and discouraging investment in the sector.

4. Global Economic Landscape & External Headwinds

The domestic policy actions are a direct response to, and are often challenged by, external turmoil.

US Trade and Visa Aggression

The most pervasive challenge is the Trump administration's aggressive trade policies:

• Steep Tariffs: The imposition of an unexpectedly high reciprocal tariff of 25% on merchandise imports from India, followed by an additional 25% punitive tariff due to India’s Russian oil trade, results in a total tariff of 50%.
  • This targets key Indian exports like textiles, gems and jewellery, electronics, and pharmaceuticals. While merchandise exports to the US are only 2.2% of India’s GDP, the sharp fall could widen the trade deficit significantly.
  • Uncertainty related to these tariffs affects companies' willingness to undertake big-ticket private capex.
• H-1B Visa Fee Hike: The fee hike to $100,000 targets India, whose professionals accounted for 71% of H-1B visas in FY24.
  • This is expected to affect the competitiveness of Indian IT service providers and threatens critical inflows like software exports and worker remittances, which historically provided resilience to India's balance of payments.
  • The rupee settled lower at 88.75 against the US dollar due to persistent foreign capital outflows, trade uncertainties, and the impact of the H-1B fee hike on IT exports.

India's Strategic and Trade Response

India is managing external risks through strategic diplomacy and diversification:

• Trade Diversification: India is actively negotiating Free Trade Agreements (FTAs) with several partners, including the US, EU, New Zealand, Oman, Peru, and Chile, as part of a push to stabilize trade and mitigate tariff shocks.
• Russian Oil Policy: Despite Washington’s advice and tariff warnings, India is unwilling to stop purchasing Russian oil as long as it is offered at a good price, arguing that Russian oil is not a sanctioned commodity. India is open to buying more US energy products as a gesture of goodwill, provided the pricing is feasible.
• Geopolitical Stance: India's External Affairs Minister hosted a meeting of BRICS Foreign Ministers, emphasizing that in a turbulent world, the bloc must reinforce the message of peacebuilding and diplomacy.