India’s economy in 2025 faces challenges from US-imposed double tariffs. However, the affected exports are under 1 per cent of GDP. This is due to the low share of exports to the US and exemptions in certain categories. India maintains a trade surplus with the US, but MSMEs suffer disproportionately. The government’s focus is on strategic autonomy and supporting domestic industries. Economic growth remains strong despite global uncertainties.
Impact of US Tariffs on Indian Economy
US tariffs affect a small part of India’s GDP, less than 1 per cent. The low aggregate export value and exemption categories reduce the impact. MSMEs are the most vulnerable due to their employment intensity. India resists external pressure by leveraging its trade surplus and diverse export markets.
Support Measures for MSMEs
Post-pandemic support for MSMEs proved effective. Liquidity on easy terms, loan rollovers without NPAs, credit warranties, and interest subsidies helped firms survive. Sunset clauses prevent misuse of support. The fiscal cost was minimal as recovery was robust. Such targeted aid aligns with fiscal consolidation efforts.
Role of Government in Economic Resilience
Government plays a key role in diversifying trade and improving business ease. Reducing dependence on any single country strengthens bargaining power. Reforms must target all government tiers, not just the central level. Streamlining municipal operations and incentivising local leaders can enhance efficiency. Political accountability grows as voters demand results.
Economic Growth and Consumption Trends
India recorded 7.8 per cent growth in Q1 2025. Private consumption rose by 7 per cent despite tighter credit. This indicates income and employment growth rather than debt-driven demand. Rural wages have increased steadily. Protecting growth from shocks remains critical for sustained progress.
Monetary Policy and Inflation Outlook
Core inflation is expected to stay soft due to export surpluses entering domestic markets. Competition from regional players pressures multinational corporations’ profit margins. Monetary policy still has room to support growth. Real interest rates remain above equilibrium as inflation trends below 4 per cent. A balanced monetary stance is necessary to help output reach potential.
Market Reactions and Monetary Challenges
Markets interpret a neutral monetary stance as no further rate cuts, pushing 10-year government bond yields above 6.5 per cent. Rising long-term yields affect the real sector and reduce monetary transmission. Exchange rate volatility and risk perceptions add uncertainty. RBI interventions aim to stabilise the rupee without causing persistent misalignments.
Liquidity and Investment Dynamics
Excess liquidity can cause asset-liability mismatches in NBFCs and lower lending standards by banks. Post-pandemic liquidity infusions were self-limiting. High growth boosts corporate profits and savings, but investment and R&D remain inadequate. China’s model of directing savings into infrastructure investment offers lessons.
Incentivising Corporate Investment and R&D
India can encourage firms to invest in R&D or infrastructure through a choice-based incentive scheme. Firms could spend 10 per cent of profit before tax on R&D, invest in infrastructure bonds, or pay taxes directed to infrastructure development. This Corporates for the Future initiative aims to prepare firms and the country for future challenges.
Questions for UPSC:
- Critically analyse the role of strategic autonomy in India’s trade policy amid global tariff challenges.
- Explain the impact of monetary policy on inflation and growth in emerging economies with suitable examples.
- What are the challenges faced by Micro, Small and Medium Enterprises (MSMEs) in India? How can government support mechanisms improve their resilience?
- Comment on the importance of corporate investment in research and development for India’s economic growth and global competitiveness.
