India’s Growth Amid Global Headwinds

• 25 Apr 2025

This editorial is based on “India amid global strain: Rate cut relief versus trade war challenges” which was published in Business Standard on 22/04/2025. The article begins by pointing to the resilience of India’s economy amid low trade exposure, but warns of growth moderation due to global tensions and falling FDI.

For Prelims: India's economic growth outlook, US tariffs, Private Final Consumption Expenditure, Gini coefficient,  PM Gati Shakti, Smart City Mission,  China+1 strategy,  Non-Performing Assets, Capital to Risk (Weighted) Assets Ratio, PM-Vishwakarma,  PM E-DRIVE, Rupee Depreciation.  

For Mains: Key Drivers of India's Economic Growth Amid Global Uncertainties, Negative Implications of Rising Global Trade Tensions on India.

India's economy, while relatively insulated with low external trade exposure, faces growth moderation to 6.5% in FY25 and 6.2% in FY26 amid escalating global trade tensions. The direct impact of US tariffs remains limited at 0.2-0.3% of GDP, but indirect effects through reduced global growth and diminished capital flows pose greater concerns as FDI inflows plummeted to $1.4 billion from $11.5 billion year-over-year. India can navigate these challenges by accelerating reforms, strengthening domestic demand, and enhancing competitiveness to capitalize on shifting global supply chains while building resilience against external shocks.

What are the Key Drivers of India's Economic Growth Amid Global Uncertainties? 

• Resilient Domestic Demand Led by Rural Rebound: Domestic consumption remains India’s strongest growth pillar, aided by rural recovery, welfare schemes, and inflation control.  
  • Government transfer schemes like PMGKAY, tax cuts, and better rural incomes have helped sustain aggregate demand despite urban consumption slowing 
  • For instance, Private Final Consumption Expenditure (PFCE) is projected to grow at 7.3% in FY25 and rural Gini coefficient dropped to 0.237 and softening CPI to 3.3% (Mar 2025) support rural optimism. 
• Public Capex as Growth Anchor Amid Private Investment Lag: While private investment remains hesitant due to global headwinds, public capital expenditure has taken the lead in driving growth, infrastructure creation, and employment generation. This counter-cyclical investment ensures a steady growth baseline. 
  • For instance, Centre’s capex rose 8.2% YoY (Jul–Nov 2024) and  ₹11.1 lakh crore allocated in FY25. 
  • Also, key infrastructure programs include PM Gati Shakti, Smart City Mission, Amrit Bharat Station Scheme, and 50-year interest-free loans to states. 
• Services Sector Momentum and IT Export Resilience: India’s services sector continues to be the backbone of growth, showing strong domestic performance and export momentum.  
  • IT, financial services, and professional services have supported jobs, value addition, and external stability even as manufacturing exports slowed. 
  • For instance, Services GVA is projected at 7.2% in FY25 and services exports up 12.8% YoY (Apr–Nov FY25). 
    • India is 7th globally in services exports and a global hub for GCCs (Global Capability Centres). 
• Manufacturing Push via PLI, China+1, and Digital Ecosystem: India’s industrial growth is now supported by the PLI scheme, improved logistics, and rising investor interest under the China+1 strategy.  
  • Though challenges remain, sectors like electronics, pharma, and defence manufacturing have seen meaningful gains. 
  • For instance, PLI was implemented across 14 sectors; smartphone exports crossed $15 billion and India stood out as a global leader in IPO activity by volume, launching 327 IPOs in 2024.  
• Strengthened Financial Sector and Credit Flow: The financial sector’s improved health has enabled smoother credit transmission and capital access, especially for MSMEs and infrastructure projects. This enhances economic resilience and investor confidence. 
  • For instance, Non-Performing Assets declined to a 12-year low of 2.6% and Capital to Risk (Weighted) Assets Ratio at a robust 16.7% (Sep 2024). 
  • Also, credit growth in MSMEs and services remains strong, and FDI inflows rose 17.9% YoY to $55.6 billion (Apr–Nov FY25). 
• Structural Reforms, Deregulation & Digital Governance: India’s growth outlook is bolstered by ongoing structural reforms — from EoDB 2.0 to targeted deregulation and mission-mode schemes in education, infrastructure, and green energy. These reforms enhance competitiveness and medium-term productivity. 
  • PM-Vishwakarma, PLI, and Self-Reliant India Fund (₹50,000 crore) aim to scale MSMEs. 
  • Also, Renewable capacity rose 15.8% YoY. NEP 2020, and green energy schemes like PM E-DRIVE drive long-term transformation 

What are the Negative Implications of Rising Global Trade Tensions on India?  

• Slowdown in Merchandise Exports and Industrial Output: India's manufacturing sector is directly impacted by global demand softening due to trade wars and protectionism.  
  • Export-oriented industries like textiles, chemicals, and engineering are seeing weaker orders, lowering capacity utilisation. 
  • For instance, India’s merchandise exports grew just 1.6% (Apr–Dec FY25) and the World Bank cut India’s FY26 growth to 6.3% citing weak external demand. 
• Vulnerability of Services Exports to Global Growth Shocks: Though resilient, India’s IT and professional services exports are exposed to economic slowdowns in the US and EU, affecting employment and revenue in the services sector. 
  • Services exports form over 40% of India’s total exports and since IMF revised global growth to 3.2% over next 5 years, below historical average, this slowdown may hit India’s GCC and ITES job market, a major white-collar employer. 
• Capital Flow Volatility and Weakening Investor Sentiment: Escalating trade tensions reduce risk appetite globally, triggering FPI outflows and volatility in India’s equity and debt markets. Investor confidence weakens amid uncertainty. 
  • For instance, FPI inflows down from $41 billion (FY24) to $2.7 billion (FY25). The equity market saw a 5-month losing streak till Feb 2025, worst since 1996. 
• Supply Chain Disruptions Affecting Industrial Efficiency: Global trade fragmentation and policy uncertainty have disrupted supply chains, affecting input availability, cost structures, and export deadlines for Indian firms. 
  • The Economic Survey 2024-25 flags slowdown in global manufacturing due to supply chain shocks, Q2 FY25 industrial growth dampened partly due to monsoon-linked and external supply chain issues. 
• Imported Inflation Risks via Rupee Depreciation: Trade tensions elevate risk aversion, boosting the US dollar and pressuring the Indian rupee, increasing the cost of imported commodities like crude oil and electronics. 
  • For instance, by February, 2025 the Rupee has depreciated by 1.8% against USD, this decline is already more than the 1.5% depreciation seen in 2023 
• Job Market Fragility in Export-Oriented Sectors: Slower exports and subdued global demand impact hiring and wages in labour-intensive sectors like textiles, gems & jewellery, and IT services, exacerbating youth unemployment. 
  • India’s youth unemployment already remains high at ~15% and Economic Survey 2023-24 highlighted a slowdown in hiring within India's IT sector over the past two years. 
• Geo-Economic Fragmentation Weakening Multilateralism: Trade wars shift focus from open multilateralism to bilateralism and strategic blocs, where India risks being squeezed unless it deepens regional partnerships or Free Trade Agreements. 
  • For instance, India has only 13 FTAs, far fewer than peers like Vietnam, and ongoing but inconclusive negotiations with Canada and the EU highlight deeper structural challenges. 

What Measures can India Adopt to Ensure Resilient Economic Growth amid Rising Global Headwinds? 

• Decentralised Capital Spending through Fiscal Federalism: India must empower states with greater financial autonomy and incentivise outcome-linked capital spending. 
  • A formula-based approach to devolve capex funds through Finance Commissions can improve regional infrastructure and job creation.  
  • Strengthening state capacity in planning and execution will amplify multiplier effects.  
    • Decentralised public investment can crowd-in private players at the state level. 
• Build a Domestic Manufacturing Mittelstand:  India should focus on creating a competitive base of medium-sized manufacturing firms, akin to Germany’s Mittelstand model.  
  • This requires systematic deregulation, simplified tax regimes, predictable policy environments, and access to technology and finance.  
  • MSME clustering and integration into global value chains must be a policy priority. Manufacturing scale can thus be built bottom-up. 
• Shift from Scheme-Centric to Outcome-Based Rural Development: To sustainably boost rural demand, India must redesign schemes for employment, skilling, and agriculture around localised outcome metrics.  
  • Integrated rural clusters with access to markets, credit, storage, and digital services will enhance productivity and consumption.  
  • Panchayats can be made nodal agencies for implementation. Stronger monitoring and decentralized feedback loops are essential.  
• Export Strategy Towards High-Value, Niche Sectors: India should transition from volume-led exports to value-led and IP-intensive sectors like semiconductors, biopharma, EV components, and defence hardware.  
  • This requires robust trade intelligence units, targeted R&D financing, and coordinated diplomacy for regulatory harmonization.  
  • Sector-specific export hubs can be created. High-value exports can buffer India from low-margin global trade volatility. 
• Develop Strategic Reserves and Sovereign Funds Beyond Oil and Forex: India should establish sovereign resilience funds — not just for oil or forex, but also for essential inputs like semiconductors, rare earths, and food commodities. 
  • These funds can be deployed during external supply shocks. An inter-ministerial resilience task force must be institutionalised.  
  • Such financial and material buffers would help manage price volatility and supply chain risk. 
• Catalyse Green Industrial Policy with Focus on Circular Economy: India must integrate climate action with industrial policy through incentives for green tech, waste-to-energy, and circular economy ventures.  
  • Regulatory clarity, green patents, and long-term carbon market frameworks are crucial. A green taxonomical classification will guide capital allocation.  
    • This ensures growth is sustainable, inclusive, and future-proof. 
• Create Employment-Focused Urban Economic Clusters: Beyond metro-centric urban growth, India needs to develop secondary cities as hubs of formal employment, startup innovation, and industrial services.  
  • Urban employment schemes linked to skilling and digital platforms can ease migration pressures. Such clusters decentralise job creation and de-risk urbanisation patterns. 
• Anchor Investment in Research, Design and Tech Transfer Ecosystems: India must move beyond manufacturing incentives to create innovation ecosystems via university-industry-government linkages.  
  • Mission-mode funding for applied research in AI, biotech, advanced materials, and quantum tech must be scaled up.  
    • National labs can incubate public-purpose technologies. This transforms India into an innovation-driven economy rather than a cost-driven one. 
• Institutional Reform of Factor Markets—Land, Labour and Logistics: Structural bottlenecks in land acquisition, rigid labour laws, and fragmented logistics reduce investment attractiveness.  
  • A model land leasing code and labour code digitisation should be fully implemented across states.  
    • National logistics cost must be cut through digitised freight corridors and port reform.  

Conclusion:  

Despite strong domestic fundamentals, India cannot remain immune to mounting global trade tensions and geo-economic fragmentation. To ensure resilient and inclusive growth, it must act decisively—scaling public investment, deepening FTAs, nurturing high-value exports, and building a robust manufacturing base. Simultaneously, future-proofing the economy through green innovation, institutional reforms, and decentralised development is key.  

Drishti Mains Question:

In the context of rising global trade tensions and geo-economic fragmentation, critically examine how India can sustain resilient economic growth.  

 

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Prelims

Q. In the ‘Index of Eight Core Industries’, which one of the following is given the highest weight? (2015)

(a) Coal production 

(b) Electricity generation 

(c) Fertilizer production 

(d) Steel production

Ans: (b) 

Q. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if: (2018)

(a) Industrial output fails to keep pace with agricultural output. 

(b) Agricultural output fails to keep pace with industrial output. 

(c) Poverty and unemployment increase. 

(d) Imports grow faster than exports. 

Ans: (c)

Q. In a given year in India, official poverty lines are higher in some States than in others because: (2019)

(a) Poverty rates vary from State to State

(b) Price levels vary from State to State

(c) Gross State Product varies from State to State

(d) Quality of public distribution varies from State to State

Ans: (b)

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Mains 

Q.1 “Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period” Give reasons. How far the recent changes in Industrial Policy capable of increasing the industrial growth rate? (2017) 

Q.2 Normally countries shift from agriculture to industry and then later to services, but India shifted directly from agriculture to services. What are the reasons for the huge growth of services vis-a-vis the industry in the country? Can India become a developed country without a strong industrial base? (2014)