India must cash in on its economic edge

CROSS-BORDER tensions, geopolitical headwinds and US President Donald Trump’s fast-changing tariff policies — the Indian economy is facing a slew of challenges. Yet, India continues to be viewed as an outlier in the global arena, performing better on the economic front than many other countries.

The United Nations has confirmed the perception in its latest report on the global economy. While downgrading India’s growth prospects from 6.6 per cent to 6.3 per cent for 2025, the UN still sees it as the fastest-growing major economy. In contrast, China is expected to grow by 4.6 per cent (from 5 per cent earlier), while the US is set to decelerate from 2.8 to 1.6 per cent this year. Emerging economies such as Brazil, Mexico and South Africa are also facing growth downgrades owing to factors like depressed trade and investments.

In this backdrop of a slowing world economy, India stands out. The Reserve Bank of India sounds similarly upbeat in its latest report, noting that the country is poised to surpass Japan this year to become the world’s fourth largest economy. Though it describes the outlook as one of cautious optimism, it points to easing of inflation pressures, while a normal monsoon forecast is expected to spur rural consumption.

The central bank has already downgraded its projection for the ongoing financial year to 6.5 per cent from 6.7 per cent, but it has pointed to the multiple strengths of the Indian economy. These include the fact that it is ringfenced by monetary, financial and political stability along with a congenial business environment and strong macroeconomic fundamentals.

This positive affirmation comes in the midst of global uncertainty, with the UN expecting global growth to touch only 2.4 per cent from the earlier forecast of 2.8 per cent. It attributes a dip in investments to uncertainty over trade and economic policies linked to the volatile geopolitical landscape. What is more worrying is that this is a broad-based scenario affecting both developed and developing economies. Even the US is facing a slowdown owing to the fallout of Trump’s tariff policies, compounded by Moody’s unprecedented decision to downgrade its credit rating.

As far as India is concerned, the big worry is the prospect of a prolonged conflict. Given the fact that Operation Sindoor has only been paused, tensions with Pakistan might flare up again. This raises the grim possibility of disruption to normal economic activity. A revival of hostilities could bring industrial and trade activities to a halt, especially in the northern and western regions.

Maharashtra and Gujarat, for instance, are among the most industrialised states in the country and any war-like situation could have a serious impact. Key energy installations are also located in both onland and offshore areas of these states as well as in Rajasthan. Any curbs on operations could affect energy security and thereby overall economic development. In the long run, the country is likely to rebound from any crisis as the economy’s resilience has been demonstrated in the post-Covid era as well as after facing external headwinds that have plagued most other economies. But there is bound to be a short or medium-term setback to the pace of growth. As it is, growth is set to fall from 7.1 per cent last year to 6.5 per cent in 2025-26.

Another element that could upset the applecart is the worsening of geopolitical fissures. Both the Russia-Ukraine war and the Israel-Gaza conflict continue despite peace efforts. Global supply chains may no longer be fractured as at the outset of the Russia-Ukraine war, but energy-related issues remain mired in uncertainty owing to Western sanctions. Oil prices have fallen but Western curbs on Russian energy have created logistical issues.

In West Asia, too, the problem is of logistics as trade flows through the Suez Canal have been hampered by Houthi attacks on merchant shipping. India has also had to face the brunt of higher trade costs as a result of ships opting for the longer route via the Cape of Good Hope.

Despite these headwinds, the UN report argues that resilient private consumption and strong public investment along with robust services exports will support economic growth in India. Its views have been buttressed, interestingly enough, by Moody’s, which says India is better placed to face the vagaries of trade disruptions owing to its large domestic economy and low dependence on exports. The ratings agency may have cut its growth forecast to 6.3 from 6.7 per cent, but it feels that India could benefit from higher US demand after the conclusion of the bilateral trade pact.

Neither of these institutions, however, have taken into account the full effect of Trump’s fast-changing tariff policies on the Indian economy. Much will depend on the outcome of ongoing negotiations. Their criticality cannot be downplayed as the US is India’s biggest market, accounting for 17 per cent of the total merchandise exports. The principle of reciprocity may mean that India will have to provide greater market access in areas earlier considered sacrosanct, such as agriculture and the dairy sector. It would be worthwhile to open up some selected segments where farmers’ livelihoods are not under threat. Similarly, tariffs raised in recent years can be reduced without an adverse impact as the domestic industry is strong enough in most areas to meet global competition.

The evolution of the final agreement will take some time, even as exporters continue to face an uphill task owing to recessionary conditions in world markets. The latest data shows a 9 per cent rise in exports in April, but this could be due to frontloading of shipments to avoid impending US tariff hikes.

The economy thus has to navigate multiple challenges at a time when growth needs to be brought to higher levels. If India is to avoid the middle-income trap that has constrained many developing economies, it has to move towards 8-9 per cent growth annually. It is only at this pace that the country can achieve the goal of becoming a developed economy over the next two decades. It may be a bright spot in the world right now, but the ambitions need to be even bigger.

Sushma Ramachandran is a senior financial journalist.

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