The year started with the broad assumption in New Delhi’s policy circles that India would emerge relatively unscathed from President Donald Trump’s tariff onslaught and wrap up an early trade deal with the US. Nearly 12 months on, both assumptions have turned out to be wrong: India now faces the highest effective tariffs into the US, higher than China, and a trade deal is nowhere in sight.When the Trump administration unleashed the 25% reciprocal tariff, following it up with the additional 25% penalty for India’s purchase of Russian crude, the consensus was on the possibility of the Indian export engine stalling. The immigration clampdown on H-1B visa holders meant a two-pronged attack on both goods and services from India.And yet, as the year draws to a close, India’s exports to the US have seen a robust uptick in November after declining through September, thanks to buoyant exports of tariff-exempt goods such as pharmaceuticals and electronics, and some genuine success in market diversification (exporters cracking alternative markets).Domestically, Indian businesses have managed steady growth in recent quarters and the Indian economy wrapped up 2025 with a fairly strong set of macroeconomic numbers, including tepid inflation and low interest rates.The other adage that proved true again is that India’s policymakers are adept at using a crisis to push through reforms. Amid the US tariffs, the NDA government shrugged off the widely-held belief that it had lost the appetite for major reforms after the diminished 2024 general election verdict.The second half of the year saw a series of legislative actions and policy steps: A set of belated GST rate tweaks, movement on the moribund labour laws and a set of nuclear sector amendments that have been a work in progress for a while and could foster private and foreign investment — at the cost of diluted supplier liability provisions.A raft of financial services reforms, including 100% foreign ownership of insurance firms and new investment rules for banks and pension funds, could set the stage for a possible foreign capital surge amid concerns around capital outflows and a widened current account deficit (CAD).Story continues below this adThere were other significant legislative amendments, including a curtailment of the rural safety net, MGNREGA. Some of the so-called quality control orders (QCOs), a bugbear for smaller companies in sectors from textiles to steel, have finally been revoked.A late surge in foreign direct investment in 2025, anchored by big commitment from the tech majors Google, Amazon and Microsoft in cloud and AI infrastructure, helped allay some growing concerns around capital flows. A managed depreciation of the rupee, now over 90 to the dollar, could act in part as a buffer against the 50% American tariff barrier.India continues to hold the mantle of the world’s fastest-growing major economy, with GDP forecast to grow 7.3 per cent in fiscal 2026.But global tariff shocks will likely continue to influence the economic outlook for the next year. A lot depends on how domestic buffers and policy levers can be deployed to act as counterbalances.Story continues below this adHigh-frequency indicators suggest that domestic economic activity is holding up in the October-December quarter, according to the RBI, although signs of weakness are emerging in other indicators.The impact of the GST rationalisation and festival-related spending supported domestic demand during October-November, but it’s a divided house on whether this will continue for long. Rural demand continues to be robust while urban demand is still only recovering.Investment activity remains mildly robust, with some signs of private investment picking up on the back of expansion in non-food bank credit, and higher capacity utilisation. It remains to be seen if that continues, given that capacity utilisation still remains bound in the 75-77% range.Story continues below this adAgricultural growth continued to be positive, helped by healthy kharif crop production, and better rabi crop sowing.“Now we can say comfortably the full-year growth will be either 7 per cent or to the north of 7 per cent rather than to the south of 7 per cent… basically we are saying the growth rate will be at least 7 per cent for 2025-26,” Chief Economic Adviser V Anantha Nageswaran said in a briefing on November 29 after the second quarter GDP data was released.Encouraging signsGoing into 2026, some domestic tailwinds such as healthy agricultural prospects, the continued impact of GST rationalisation, low inflation, and healthy balance sheets of corporations and financial institutions should continue to support economic activity.Continuing reform initiatives will further facilitate growth. The opening up of the nuclear sector could see investments coming back to the power sector at a pivotal transition period, when renewable investments are slowing.Story continues below this adIn terms of services exports, India’s global market share has gone from 2% to 4.5% in less than a decade. This attests to the fact that the global population is ageing and there is a need for younger workers. But immigration policies are becoming tougher in the US and in Europe. So, given that visas are a problem now, the work has to be done remotely, which is probably working to India’s advantage for now.Also Read | Yearender 2025 | A year of deepening political divides sets the stage for anotherWhether this will sustain is a policy opportunity, and challenge. The rise of Global Capability Centres has largely been serendipitous, but there are question marks over the level of value addition being done in India.Growth headwinds from the mostly intended fiscal and largely unintended monetary tightening that slowed the economy in FY25 have abated, resulting in growth revival in FY26, according to Axis Capital’s 2026 Outlook.Story continues below this adIn FY27E, Axis economists expect monetary easing to drive above-trend growth of 7.5%. While regulatory easing — revoked QCOs, new labour codes — will boost growth over the medium term, their announcement boosts sentiment.External headwindsOn the external front, things look more uncertain. Though the implementation of the tariffs has been far less potent than was feared, there is still a lack of clarity on where all this is heading. Merchandise exports also face challenges.“Given significant economic slack, growth can stay above trend for a while before inflationary pressures warrant policy tightening. The incessant structural pressure of Chinese exports (to India’s export markets) and higher global capital costs are challenges, but not enough to derail growth,” according to Neelkanth Mishra and team at Axis Capital.According to Sajjid Z Chinoy, Managing Director and Chief India Economist at JP Morgan, the AI boom is masking some of the effects of the tariffs in the US, but the American labour market has weakened materially. And the tariffs will slowly begin to bite as American inflation goes up.Story continues below this adThe American trade blockade of China could have another repercussion. There is concern over Chinese exports being diverted away from the US — flooding Asia, coming into India, parts of Africa, even Latin America. So emerging markets, including India, have a problem, as Axis Capital has flagged.While there is still no clarity on the US trade deal, the speedy conclusion of ongoing trade and investment negotiations with the EU and other countries could present upside potential, the RBI said, while upgrading real GDP growth for the first quarter of 2026-27 to 6.7% and Q2 to 6.8%.While India’s current account deficit at 1.3% in the second quarter of 2025-26 doesn’t seem alarming, amid robust services exports and strong remittances, there are some concerns on financing it if foreign investment outflows continue. Healthy services exports coupled with strong remittance receipts are expected to help manage the CAD in FY26.For the Indian stock markets, a slowdown in corporate earnings and uncertainties stemming from US tariffs led to persistent outflows of foreign investors. This could continue amid outflows in the equity segment. Flows under external commercial borrowings and non-resident deposit accounts moderated as compared to last year.Can demand drive growth?Story continues below this adA World Bank report from February 2025 said that India would need to grow by 7.8% on an average over the next 22 years to achieve its aspirations of reaching high-income status by 2047.Over the past three decades, trend growth (seen as five-year average) through varying external environments, fiscal stances and under different governments, has been at 6-7%.The five-year CAGR came close to 8% only in the FY03-08 period, when the workforce was expanding rapidly and up-cycles in power generation, real estate and global growth boosted capital formation. Replicating that is a challenge.There are some positive factors that can help. Corporate balance sheets are strong and leverage is low.And India needs to build on its one sustained success story, where even China has failed: Stoking domestic consumption demand.That could have a cyclical impact on private investments — the one enduring struggle of the NDA government has been its inability to foster private investments.Talk to corporates and, in private, most would attest to the fact that one needs to have more demand visibility to step up investments. Capacity utilisation has to be around 80% for at least three or more quarters for companies to plan greenfield projections.Private investments continue to falter since entrepreneurs are not seeing enough consumption demand. Tepid private investments have an impact on FDI inflows too.Both high-end urban consumption and government spending, which have held up the economic momentum since the pandemic, are clearly ebbing. Exports are forecast to be sluggish.This is why it is key to stoke private investments as an alternative engine for the economy.Questions for the coming yearAs 2025 wraps up, there are perhaps more questions than when the year started. Will the US economy go into recession? Will the AI exuberance end? Will the AI-fuelled stock market bubble in the US burst? What would that do to countries such as India?