India’s Economic Growth Amid Global Trade Challenges

India’s economy in 2025 faces external pressures from high reciprocal tariffs imposed by the United States. Despite this, domestic demand remains supported by government measures like reduced income tax and GST rates. The International Monetary Fund (IMF) has revised India’s GDP growth forecast for 2025-26 upwards to 6.6 per cent, though projecting a slowdown to 6.2 per cent in 2026-27. This growth outlook depends heavily on sustaining domestic consumption amid global uncertainties.

Current Economic Context

India benefits from a good monsoon and benign inflation. These factors have boosted rural income through higher minimum support prices for crops. Strong tractor and two-wheeler sales, increased government spending on agriculture, and rising agricultural exports indicate robust farm sector growth. Manufacturing shows improvement in steel production, industrial output, and exports excluding petroleum and agriculture. The services sector displays mixed trends; while e-way bills and toll collections rise, air travel and services exports moderate.

Trade and Export Dynamics

India’s goods exports grew 7 per cent in the first half of 2025, aided by front-loading before US tariffs took effect. Electronics exports surged by 40 per cent, supporting overall export growth. However, sectors like gems, textiles, seafood, and leather face declines due to high US tariffs. In September, exports to the US dropped 12 per cent except for electronics. Services exports remain a strong pillar, growing at a compound annual rate of 10 per cent since FY18 and continuing to grow by 10 per cent in early 2025.

Capital Flows and Foreign Exchange Reserves

Foreign portfolio investments have seen outflows, and foreign direct investment remains weak. These factors create volatility in capital flows amid global uncertainty. Nevertheless, India’s foreign exchange reserves stand high at around $690 billion, providing a buffer against external shocks. The current account deficit is expected to stay comfortable at about 1 per cent of GDP, supported by remittances, services exports, and stable crude oil prices.

Domestic Demand and Government Spending

The government has focused on boosting domestic demand through tax cuts and GST rationalisation. Consumer spending has been strong during festive seasons. Central government capital expenditure rose sharply by 40 per cent in the first half of the year, even after adjusting for food distribution spending. Private investment is also picking up in sectors such as power, cement, pharmaceuticals, construction, and logistics.

Growth Projections and Inflation Outlook

Economic growth is estimated at 7.8 per cent in Q1 and 7.2 per cent in Q2 of 2025. Growth may moderate to 6.3 per cent in the second half due to export challenges and fiscal consolidation efforts. Full-year GDP growth is projected near 6.9 per cent. Inflation is easing, expected to average 2 per cent in the second half, down from 2.2 per cent earlier. This lower inflation may allow the Reserve Bank of India to reduce interest rates if growth slows.

Challenges for Sustained Growth

Long-term growth depends on raising household incomes and job creation. Urban wage growth has been weak, partly due to slow hiring in the IT sector. Tariff impacts on labour-intensive exports may further reduce household income. Structural reforms are needed to boost private investment and employment generation, which are essential for maintaining steady economic expansion.

Questions for UPSC:

1. Critically discuss the impact of reciprocal tariffs on India’s export sectors and domestic employment.
2. Analyse the role of government fiscal policy and tax reforms in sustaining domestic demand during global economic uncertainty.
3. Examine the factors contributing to India’s current account deficit stability and the role of foreign exchange reserves in economic resilience.
4. Estimate the challenges and opportunities in balancing inflation control and economic growth through monetary policy in emerging economies like India.

Answer Hints:

1. Critically discuss the impact of reciprocal tariffs on India’s export sectors and domestic employment.

1. High US reciprocal tariffs have caused a 12% fall in India’s goods exports to the US, especially affecting labour-intensive sectors like gems, textiles, seafood, leather, and footwear.
2. Electronics exports remain an exception, growing robustly by 40%, cushioning overall export performance.
3. Decline in exports of labour-intensive goods threatens domestic employment, particularly in manufacturing and export-oriented small and medium enterprises.
4. Reduced export demand may depress household incomes, especially in urban areas reliant on export sector jobs.
5. Potential negative multiplier effect on rural and urban economies due to job losses and reduced income.
6. Structural reforms and diversification of export markets are needed to mitigate tariff impacts and sustain employment.

2. Analyse the role of government fiscal policy and tax reforms in sustaining domestic demand during global economic uncertainty.

1. Reduction in income tax and rationalisation of GST rates have increased disposable income and consumption capacity.
2. Government capital expenditure surged by 40%, stimulating investment and supporting economic activity.
3. Good monsoon and increased minimum support prices boosted rural incomes, enhancing rural demand.
4. Lower inflation and interest rates provide favorable conditions for credit growth and consumer spending.
5. Strong festive demand reflects effectiveness of fiscal stimulus in supporting domestic consumption amid export challenges.
6. Fiscal consolidation commitment may moderate government spending in second half, posing risks to demand momentum.

3. Examine the factors contributing to India’s current account deficit stability and the role of foreign exchange reserves in economic resilience.

1. Services exports growing at 10% CAGR since FY18 provide a steady inflow, offsetting goods export volatility.
2. Remittances and benign global crude oil prices help maintain a comfortable current account deficit (~1% of GDP).
3. High foreign exchange reserves (~$690 billion) act as a buffer against external shocks and currency volatility.
4. Persistent foreign portfolio outflows and weak FDI create capital flow volatility but reserves provide stability.
5. Stable CAD and strong reserves enhance investor confidence and macroeconomic stability amid global uncertainties.
6. Continued focus on export diversification and attracting stable FDI is critical for sustaining resilience.

4. Estimate the challenges and opportunities in balancing inflation control and economic growth through monetary policy in emerging economies like India.

1. Moderation in inflation (projected ~2% in H2) offers RBI flexibility to cut interest rates if growth slows.
2. Low inflation supports consumer purchasing power and investment, aiding growth without overheating economy.
3. Global uncertainties and external shocks require cautious monetary stance to avoid capital outflows and currency depreciation.
4. Monetary policy must balance supporting growth while preventing inflation resurgence, especially from food and fuel prices.
5. Structural constraints like weak wage growth and job creation limit transmission of monetary easing to demand.
6. Coordination with fiscal policy and structural reforms is essential to sustain growth and price stability in emerging markets.