India outpaces China with 7.4% growth in Q4 FY25 as global economy cools

By: Shantanu Bhattacharji

Domestic momentum remains strong, buoyed by public capex, manufacturing uptick, and resilient agriculture. But as global headwinds gather, sustaining growth will demand strategic agility and long-pending structural reforms.

India’s economic engine fired on all cylinders in the final quarter of FY25, with GDP (gross domestic product) expanding 7.4 per cent year-on-year—the fastest pace in over a year and well above expectations. Powered by strength in construction and manufacturing, the performance highlights the resilience of domestic drivers even as the global backdrop remains challenging. 

More importantly, the underlying picture is just as strong. Gross Value Added (GVA), which excludes volatile components such as indirect taxes and subsidies, rose 6.8 per cent in the quarter, up from 6.5 per cent previously. The data points to broad-based traction across sectors, not just headline statistical bounce. 

Chief Economic Adviser V Anantha Nageswaran was quick to note the significance of the outperformance, calling it evidence of India’s strength in a “growth-scarce environment.” It’s a fair claim—China grew at 5.4 per cent over the same period, and few other large economies are clocking numbers in that range. 

The Reserve Bank of India (RBI) expects full-year growth in FY26 at 6.5 per cent, in line with its prior projection. At that pace, India remains on track to overtake Japan’s nominal GDP—estimated at $4.18 trillion—cementing its place as the world’s third-largest economy.

But risks are building. Chief among them is the threat of escalating trade tensions, particularly if the US moves forward with new tariffs on key sectors. Such a move would come just as New Delhi seeks to expand its export base and deepen integration into global value chains. 

At present, the domestic story looks solid. Public capex continues to support construction, manufacturing is showing signs of revival, and agriculture—often weighed down by weather volatility—surprised on the upside. But with global tailwinds turning into headwinds, the government should resist complacency. 

Experts are of the view that the economic growth premium is intact. Keeping it that way will require agility in trade strategy and deeper structural reforms to sustain private investment and productivity gains. 
 
With the total size of the economy—called nominal GDP—rising by 9.8 per cent to Rs 330.7 lakh crore is slightly higher than what the government had predicted in the Union Budget earlier this year. The unexpected boost helped the finance ministry marginally improve its fiscal position, with the fiscal deficit—the gap between what it spends and earns—ending at 4.77 per cent of GDP, better than the 4.84 per cent it had estimated. 

A closer look shows that while the economy did grow overall, the part that reflects real production and services—GVA—grew more slowly, especially in the final quarter of the year (January to March). GVA grew by 6.8 per cent in that quarter, while GDP grew faster. Why the difference?

The answer lies in taxes and subsidies. GDP includes what the government collects in taxes (such as GST and income tax) and subtracts what it gives out in subsidies (such as food, fuel, or fertilisers). This year, the government gave fewer subsidies than before, so net taxes went up. That made the GDP number look stronger, even though actual business output—what GVA measures—didn’t grow as fast. 

Notably, one of the biggest contributors to this year’s economic momentum was a record agricultural harvest. Foodgrain production hit an all-time high of 354 million tonnes, up 6.6 per cent from last year. It gave an impetus to rural India, where demand has been weak and weather risks had cast a shadow in recent years.  

The services sector, which includes trade, hotels, finance, and real estate, remained the main engine of growth in FY25. Sectors such as travel and retail saw strong rebounds post-Covid, and rising GST collections suggest activity is up. However, manufacturing growth was uneven. While some industries like automobiles and capital goods did well, others like textiles and small-scale manufacturing continue to struggle with low demand and global uncertainty. 

Despite this stronger-than-expected finish to FY25, economists warn that FY26 growth may moderate because of rising global headwinds. The trade war between the US and China has flared up again under President Donald Trump’s tariff-first approach, which could hurt India’s exports, especially in electronics, garments, and auto components. 

Plus, urban demand is still not firing on all cylinders. Wage growth remains tepid, and job creation outside agriculture is sluggish. Real estate, a key job generator, is recovering but not booming. Consumer spending, particularly on big-ticket items like cars and appliances, is uneven. 

Analysts say the litmus test for the government is turning this one-year surge into sustained, broad-based growth—not just a statistical high, but real improvements in jobs, investment, and incomes.