India’s growth outlook: India has defied global economic headwinds to remain the fastest-growing major economy for two consecutive years. Yet even as domestic demand holds strong and macro fundamentals appear stable, external pressures are once again building. The latest warning light is emanating from Washington.
President Trump’s proposed hike in tariffs—set to hit Indian exports with a 26% duty if no bilateral accord is reached by July 9—has reintroduced a level of trade uncertainty not seen since the height of the US-China trade war. According to the finance ministry’s April Monthly Economic Review, this looming escalation casts a shadow over India’s economic outlook, particularly at a time when global growth remains fragile.
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While India’s exposure to US exports is modest—goods exports to the US comprise only 2% of GDP—the ripple effects of rising trade barriers are likely to be broader. Tariffs on China are pushing multinational firms to reconsider supply chains, and India risks becoming collateral damage if volatility deters new investment.
FDI collapse and capex caution
The impact is already visible in capital flows. Net foreign direct investment plunged by 96% in FY2024–25 to just $353 million, down from $10 billion the previous year. More alarmingly, Indian firms are turning their backs on domestic investment in favour of overseas markets: outward FDI surged 75% to $29.2 billion, with destinations including Singapore, Mauritius, the UAE, the Netherlands and the United States. This massive capital outflow was one of the key reasons net FDI turned nearly flat.
At a time when the Union government is relying on private sector capex to revive the investment cycle, these trends are particularly disquieting. Data from the Centre for Monitoring Indian Economy shows that the ratio of dropped to new private sector projects has climbed to 36% in FY25, up from 30.8% in FY24 and 21.8% in FY23. This signals mounting hesitation among Indian corporates, who are responding not only to global volatility but also to policy and regulatory ambiguities at home.
Inflation and monetary policy pressures
Higher tariffs do not just depress trade—they also reshape inflation trajectories. The IMF’s April 2025 World Economic Outlook notes that protectionist measures are reversing previous assumptions: inflation is now expected to rise in advanced economies and moderate only marginally in emerging and developing economies.
This has clear implications for India. The Reserve Bank of India’s monetary stance has so far remained calibrated, balancing domestic price stability with international cues. But if imported inflation from commodity price spikes or currency volatility begins to build, it may force the central bank to tighten sooner than anticipated—potentially slowing down growth.
Adding to the concern is the services sector, which has thus far been spared the worst of trade disruptions. However, as the Finance Ministry’s report warns, prolonged policy uncertainty could undermine cross-border investments in IT, financial, and professional services—sectors heavily reliant on global mobility and digital infrastructure.
India’s growth: Hope on the horizon
Yet all is not bleak. The turbulence may offer India an opening. Trade disruptions are accelerating the realignment of global supply chains, and India is beginning to emerge as a credible alternative to China in select sectors. Apple’s iPhone shipments from India to the US surged 76% in April, according to trade data, as manufacturers diversified their assembly base. For the first time, India outpaced China in monthly US-bound iPhone shipments.
This trend—if supported by consistent policy, faster clearances under the PLI scheme, and improved logistics infrastructure—could extend to other high-value manufacturing segments such as solar modules, EV components, and speciality chemicals.
Moreover, a slowdown in global growth could actually bring macroeconomic relief. The IMF forecasts a 15.5% decline in oil prices in 2025, which would ease pressure on India’s current account and tame inflation. Lower energy costs would also provide fiscal room to fund consumption and social-sector schemes.
India may also benefit from shifting portfolio flows. As US growth slows and its asset markets turn volatile, capital could be redirected toward emerging markets with better fundamentals. With projected real GDP growth still above 6%, India is well-positioned to attract inflows—provided domestic policy remains stable.
The imperative for strategic clarity
The key challenge for Indian policymakers lies in restoring investor confidence—both domestic and global. That will require not just reactionary measures, but strategic signalling: clear trade diplomacy, accelerated investment facilitation, and legal predictability.
The possibility of a bilateral trade agreement (BTA) with the United States, while remote, remains a hopeful prospect. If concluded in time, it could offset some of the impending tariff pain by opening fresh market access and giving exporters long-term clarity. But even without a deal, India must act decisively to retain its appeal as an investment destination.
The world is entering a phase of fragmentation, where economic resilience will depend not just on growth rates, but on agility and credibility. India has the fundamentals to weather this storm. But unless the investment climate is fortified against the rising tide of protectionism, growth could slip from impressive to merely adequate.