Global Trade Uncertainties and India’s Growth

The global economy is rattled with imposition of tariff on all US imports by Trump administration, signalling the end of decades-long era of trade liberalization. The trade protectionism moves from the US are seemingly aimed at achieving lower trade deficit by making imports costlier and thus relocating manufacturing onshore; reverse dollar strengthening that puts US exporters relatively at disadvantage and, to raise government revenues to reduce public debt. These objectives, seemingly innocuous from US point of view, are at a conflict from economics perspective. These are unlikely to be achieved concurrently especially with output losses likely to undermine non-tariff revenues, price pressures leading lower rate cuts from the US Fed and rise in uncertainties making investors take safety in dollar assets, thereby ending up strengthening USD.

Expectedly, the Trump’s tariff has sparked condemnation with threats of retaliatory countermeasures from China and the European Union, potentially escalating into a full-blown trade war. With imposition of 26 per cent tariff on India, 34 per cent on China, 46 per cent on Vietnam, and 20 per cent on the EU, among others, the repercussions of trade weaponisation could be far-reaching, spilling into competitive currency devaluations and further geo-political conflicts.

Investor sentiment, once buoyed by the anticipation of the incoming Trump administration, has significantly weakened due to fears of stagflation arising from likelihood of tariff induced-inflationary pressures coupled with reduced growth, wiping off $5.2 trillion in market value from US markets within three weeks, from its mid-February peak to mid-March.

For India, there is somewhat a sense of relief of getting relatively lower tariff rates compared to other Asian economies. However, with US being India’s largest export market (trade surplus of $46 bn in 2024), India must actively engage in negotiating Bilateral Trade Agreement with US soon. India should also be diversifying its export markets via Free trade Agreements with UK, EU and New Zealand in the very-near term. Coupled with diversification, identification of goods with high export potential and exploring un-conventional regions like Latin America, Africa, Oceania and countries with high demand for Indian products is imminent to minimize repercussions of tariffs on the nation’s growth.

Merchandise trade deficit for India stood at its lowest level in February 2025 ($14 billion) since August, 2021 ($11.7 billion), on the back of 30 per cent (y/y) decline in crude oil imports and 65 per cent decline in gold & silver imports. Net services inflows continued their buoyancy at $18.5 billion. With services and pharma exports seen less vulnerable to Trump’s tariffs, India’s external sector is relatively better placed, provided trade diversion-induced dumping is kept under check.

At the growth front, high frequency indicators affirm recovery in economy continuing in fourth quarter of financial year 2024-25. The purchasing managers’ index (PMI) for manufacturing, at 58.1 for March 2025, stood at its highest level in past eight months, driven by rise in new orders index signalling improving demand conditions. Strong growth in demand for consumer durables under index of industrial production also affirms recovery. The ongoing tariff uncertainties amid a slowdown in global growth, however, could spill over to India, dragging our GDP growth down by 50 basis points to 6 percent in financial year 2025-26.

Encouragingly, inflation, as measured by consumer price index, prints for February 2025 at 3.61 per cent (y/y) was the second lowest in past five years (only above July 2024 print at 3.60 per cent) on the back of continued moderation in food prices and deceleration in fuel prices. While core inflation, though nudged up a little in February 2025, the overall CPI inflation outlook remains benign with healthy summer crop sowing and expectations of healthy Rabi and Kharif crop harvest ahead.

Bank credit growth, however, moderated to 11.1 per cent (vs 20.4 per cent y/y a year ago) in early March 2025, reflecting the need to ease credit conditions. Consistent FPI inflows into India’s debt segment more than compensated for equity outflows, leading to an appreciation of 0.5 per cent (m/m) in INR against the USD after 4 months of continued (m/m) depreciation. Amidst expectations of repo rate easing, it has pushed the India benchmark yield below 6.5 per cent.

With change in inflation dynamics and INR appreciating, the RBI has found policy space for supporting growth. It has been actively infusing liquidity in the system via variable rate repo auctions and open market operations buying securities. In the past three months, the RBI infused close to Rs 8 lakh crore in banking system, turning the liquidity in mild surplus mode, creating enabling conditions for better transmission of rate cuts. As trade headwinds effect demand, the case for sustained monetary accommodation has only strengthened, going forward.