India's Aviation Defies Strong GDP, But Rupee and Tariffs Cause Turbulence

India's economic performance in 2025 presented a paradox for the India aviation sector 2025.

Strong domestic growth and policy reforms provided a major tailwind. However, global trade wars and currency volatility created significant headwinds for Indian airline profitability and air cargo operations.

Domestic Demand and Policy Support

The country's robust economic expansion continued to fuel the aviation boom. Real Gross Domestic Product (GDP) grew by a stunning 8.2% in the July–September quarter of FY 2025-26. This strong macroeconomic environment supports a growing middle class and sustained air travel demand. India remains one of the world's fastest-growing major economies. The nation is on track to become the third-largest economy by 2030, according to IMF projections.

Domestic air traffic continued its strong recovery. International passenger volumes grew faster than domestic traffic. This trend is supported by strong outbound travel demand.

GST Reform Boosts MRO and Training

One major policy change directly benefited the aviation ecosystem. The introduction of GST 2.0 in September rationalized indirect taxes. Crucially, the tax on domestic Maintenance, Repair, and Overhaul (MRO) services was slashed. The rate dropped from 18% to 5% with full Input Tax Credit (ITC). This reform is designed to make India a global MRO hub. It encourages airlines to perform maintenance locally, rather than in foreign hubs like Dubai or Singapore. The Indian MRO industry is projected to become a $4 billion industry by 2030.

• GST on commercial drones was cut to 5%.
• Flight simulators for pilot training were exempted from IGST.

This tax relief supports infrastructure and technology growth. It aligns with the government's goal to increase the number of operational airports to 220 by 2025. Major carriers like IndiGo and Air India continue fleet expansion, placing large orders with manufacturers like Airbus.

Premium Travel Costs Rise

Not all tax changes were favorable for passenger airlines. The GST rate on Business Class tickets was raised from 12% to 18%. The International Air Transport Association (IATA) expressed disappointment over the hike. This increase is expected to dampen demand in premium cabins. Full-service carriers may be more exposed to this change.

External Shocks and Profitability Pressure

Despite domestic strengths, external factors created severe financial pressure. The Indian rupee (INR) slipped to a record low near Rs 91 per US dollar in December. This Rupee depreciation impact is a major concern for Indian airline profitability.

• Most airline expenses are dollar-denominated.
• These costs include lease rentals, maintenance, and fuel.
• Analysts estimate a 1% rupee drop cuts airline Profit Before Tax by 5-6%.

The currency swing became a larger driver of earnings volatility than fuel costs. While international airfares rose sharply (estimated 13% year-on-year), this offered only a partial hedge. Domestic fares remained largely flat due to the price-sensitive market.

Tariffs Cripple Air Cargo Volumes

The year was also marked by rising global protectionism. US President Donald Trump imposed punitive tariffs on Indian goods. Tariffs reached up to 50% by late August 2025. This move had an immediate, severe impact on air cargo volumes India US.

Figures from data provider WorldACD showed air cargo volumes from India to the US plummeted. Tonnages fell 12% in one week, followed by another 14% drop in the next. Air cargo movement between the two nations plunged to a nine-year low. The tariffs reversed momentum gained from US importers diversifying away from China.

• Spot rates on the India-US lane fell below $4/kg.
• Exporters redirected shipments, boosting India-to-Europe cargo flows.

Looking ahead, a December announcement by Mexico poses another risk. Mexico plans a blanket tariff hike of up to 50% on non-free trade agreement countries. This shock, effective January 1, 2026, could affect nearly 75% of India's exports to Mexico. This highlights the growing risk of a tariff-heavy global trade system for air logistics and supply chains. For the latest in commercial aviation news, visit flying.flights.

In hindsight, 2025 was a year of resilience for India's aviation market. Strong passenger demand and key MRO reforms provided a solid foundation. Yet, the sector enters 2026 facing significant cost and volume challenges from a weak rupee and escalating global trade tensions.