Amid rising global tensions and uncertain trade policies, India is facing significant challenges to its economic growth. The Union finance ministry highlights the effects of fluctuating commodity prices and financial market volatility as the country seeks to mitigate the repercussions of U.S. tariffs. In the economic review released on Wednesday, officials noted that developments impacting tariffs across multiple nations have slowed India’s exports during the fiscal year 2025 (FY25).

Trade Uncertainties Impacting India

The Global Trade Policy Uncertainty Index soared to an unprecedented 237.4 in the fourth quarter of 2024. This sharp increase is attributed to various tariff-related issues worldwide, which have created heightened risks for investment and trade flows. Consequently, India has experienced a slower growth rate in exports this fiscal year, despite a thriving services sector that is helping balance the decline in merchandise exports.

• Merchandise exports rose only 1.39% year-on-year, reaching $358.91 billion from April 2024 to January 2025.
• Imports, on the other hand, surged by 7.43%, totaling $601.90 billion, resulting in a trade deficit of $22.99 billion as of January 2025.

Economic Forecasts and Growth Challenges

The World Trade Organization (WTO) recently updated its forecasts, adjusting the global goods trade growth for 2024 slightly upward to 2.7% but reducing the 2025 estimate to 3% due to weaker demand in Europe. This was prior to the announcement of reciprocal tariffs by the U.S., which are predicted to impact 87% of India’s exports to the U.S., valued at $66 billion.

Currently, the two nations are engaged in negotiations for a trade deal that could mitigate the effects of these tariffs. The Indian budget has positioned agriculture, Micro, Small, and Medium Enterprises (MSMEs), investments, and exports as key growth drivers, instilling optimism in the economy despite geopolitical challenges.

Economic Growth Trajectory

India’s economic growth has moderated, but it retains its status as the fastest-growing major economy. According to the National Statistical Office (NSO), real GDP growth was recorded at 8.2% in FY24 and is projected to decline to 6.5% in FY25. The December quarter (Q3 FY25) showed a recovery, with GDP expanding by 6.2%, rebounding from 5.6% in the previous quarter. Achieving the NSO’s growth target will necessitate a robust 7.6% growth in the final quarter.

Key Economic Drivers

Key components such as exports, consumption, and investments, alongside vital sectors like manufacturing and agriculture, must perform strongly to sustain economic momentum.

• Gross fixed capital formation (GFCF) saw a slowdown, growing only 5.7% in Q3 FY25 compared to 5.8% in Q2.
• Conversely, private final consumption expenditure (PFCE) rose by 6.9%, while government spending surged by 8.3%.

The latest HSBC flash survey indicates a slight softening in the private sector due to slower services growth, although manufacturing remains robust, with a PMI Output Index reaching 60.6—the highest since July 2024.

Signs of Economic Revival

Economist Poonam Gupta from the National Council of Applied Economic Research (NCAER) has pointed out that despite external challenges, several indicators suggest a potential rebound for the Indian economy. Improvements in metrics such as the manufacturing PMI and GST collections reflect this optimism.

• Retail inflation has eased to a seven-month low of 3.61% in February, down from 4.26% in January, driven by slower food price increases.
• Food inflation specifically dropped to 3.75%, enhancing prospects for an interest rate cut.

Future Outlook

Experts predict that while exports may face challenges due to U.S. actions and weak global demand, consumption and investment are expected to strengthen. Supportive measures from the Reserve Bank of India regarding interest rates and the government’s focus on fiscal discipline could bolster economic activity in the latter half of the fiscal year.

With the right strategies, India could navigate these turbulent waters and achieve its 6.5% GDP growth target, albeit with attention to external economic factors. As challenges persist, the resilience of the Indian economy remains a focal point for stakeholders and analysts alike.