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The International Monetary Fund (IMF) has put the spotlight on the consistently high growth performance of the Indian economy at a time when the rest of the world is wilting due to headwinds of geopolitical tensions and protectionist trends.
The first quarter of the current fiscal (2025-2026) has recorded a buoyant 7.8% rise in GDP. Forecasts for the entire year are in the range of 6.5-6.9%, higher than most major economies. According to IMF managing director Kristalina Georgieva, India has emerged as a key growth engine even as China has been decelerating steadily. As for global growth, she noted the forecast was roughly 3% in the medium term, compared to 3.7% in the pre-Covid-19 period.
Yet Georgieva felt the world economy had generally withstood acute strains from multiple shocks. She maintained that the resilience stemmed from improved policy fundamentals, private sector adaptability, less severe tariff outcomes than initially feared, and supportive financial conditions. As for emerging economies like India, she felt they had significantly upgraded policy frameworks and institutions.
Challenges ahead
Despite this relatively bright scenario, India faces several challenges to maintain the growth momentum. The first is the tariff issue, which was downplayed by the IMF chief. No doubt the 50% tariff levied by the United States on India’s exports will have negative consequences, given that of the $437 billion worth of total annual goods exports, $86 billion goes to the US market. What is worse is that tariffs have been levied on labour-intensive sectors such as apparel and leather footwear, as well as gems and jewellery. Many export units have laid off workers and artisans as buyers are not prepared to place orders at such high rates.
The second factor that could upset growth calculations is the continued reliance on China for critical minerals like rare earths. The decisions to set up a critical minerals mission as well as to stockpile rare earths are positive developments, but needed to have been taken much earlier. Import dependence on the northern neighbour is also a reality, particularly regarding key pharmaceutical ingredients and some fertilisers. In all these categories, China has recently imposed curbs on imports. For the time being, a diplomatic outreach has averted a crisis in availability. For the long term, however, alternative sources for these products will have to be identified while enhancing domestic production.
Silver lining
At the same time, negative outcomes could well be mitigated by a recent spate of measures taken to combat the impact of US tariffs. This includes the move to rapidly conclude free trade agreements with major export destinations like the United Kingdom, and Europe. The FTA with the European Free Trade Area (EFTA) may be confined to only four countries, but these are advanced economies with the capability to absorb both industrial and farm exports from this country in large volumes.
The India-UK FTA is also likely to provide an edge to exporters, who have been facing tough competition from China, Indonesia, and Vietnam. The concessions, which cover 99% of tariff lines, provide tremendous opportunities in a market which has enormous potential.
The other substantive initiative taken to blunt the impact of weaponised tariffs has been the rationalisation of the Goods and Services Tax. The impact is already being felt in the festival season as e-commerce platforms are witnessing record sales of products across the spectrum. This could be the initial response to cheaper goods following the tax cuts, so a better assessment will be possible only by December. Even so, it seems evident that the gamble to lose revenues up to Rs 48,000 crore this year due to the tax changes is likely to pay off in terms of higher consumption. This should, in turn, spark off a virtuous cycle of higher investment, and bring about the much-needed animal spirits to the economy.
While India may be described as the global growth engine by the IMF chief, a 6.5% growth rate is not sufficient to achieve the aim of becoming a developed economy by 2047. In comparison to other countries, it is certainly more resilient and capable of tackling external headwinds, but it must march to the beat of its own drum. The bar for economic growth, thus, needs to be raised to a much higher level.
Sushma Ramachandran is a senior journalist.
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.