India’s 2025 Economic Balancing Act: Can Domestic Resilience Counter Global Trade Turbulence?

By IndraStra Business News Desk

Cover Image Attribute: The file photo of Mumbai Skyline / Source: Canva Pro

India’s economic trajectory in 2025 stands at a pivotal juncture, poised between the resilience of its domestic market and the uncertainties posed by global trade dynamics. As the world’s fourth-largest economy, India’s growth narrative is both promising and fraught with challenges, as outlined in recent analyses from Deloitte Insights, the Reserve Bank of India (RBI), and other economic observers. The nation’s ability to navigate this complex landscape—bolstered by strategic fiscal policies yet tested by external trade pressures—will shape its path toward achieving developed economic status by 2047, a vision encapsulated in the goal of Viksit Bharat. This op-ed delves into the nuances of India’s economic outlook, drawing on the cautious optimism of recent reports while acknowledging the risks that could temper its progress.
India’s economy has demonstrated remarkable resilience, with Deloitte Insights forecasting GDP growth of 6.3% to 6.5% for fiscal year 2024-2025, and a slightly higher 6.5% to 6.7% for 2025-2026. These projections come against a backdrop of a third-quarter GDP growth of 6.2% year-over-year for 2024-2025, a figure that, while robust, appears to signal a slowdown compared to the revised 9.2% growth for 2023-2024—the highest in 12 years, excluding the post-pandemic rebound. The upward revision of previous years’ GDP figures underscores the strength of India’s domestic demand, which the RBI identifies as the nation’s biggest growth driver. “The Indian economy is exhibiting resilience despite the high trade and tariff-related uncertainty,” the RBI noted in its latest assessment, highlighting the stabilizing role of domestic financial and political conditions.
A key pillar of this resilience is the government’s strategic fiscal policy, particularly the tax exemptions announced in the 2025 Union Budget. By raising the income tax exemption limit to INR 1.2 million (approximately INR 1.275 million for salaried individuals) and reducing tax slabs across other income brackets, the government has targeted the middle-income class, which constitutes 31% of the population and is projected to grow to 38% by 2031. This policy is expected to inject INR 630 billion in disposable income into the hands of consumers, particularly young ones with a higher propensity to spend. Deloitte estimates that this tax stimulus could boost GDP by 0.6% to 0.7% in 2025-2026, with a potential consumption multiplier effect generating economic activity worth INR 6.7 trillion to INR 7.9 trillion in the medium term. However, this comes at a cost: the government will forgo INR 1 trillion in annual revenue, potentially straining its fiscal capacity. Yet, as Deloitte notes, higher economic activity is expected to offset this revenue loss, helping the government meet its fiscal deficit targets.
The optimism surrounding domestic demand is further supported by high-frequency indicators. Recent months have seen a surge in goods and services tax collections, auto sales, and fast-moving consumer goods (FMCG) sales, with the FMCG sector recording 5.7% growth in the July-September 2024 quarter, driven by a robust 6% growth in rural areas compared to a modest 2.8% in urban centers. The flash HSBC composite purchasing managers index for May 2025, compiled by S&P Global, signaled a strong influx of new business from both domestic and global markets. “India’s flash PMI indicate another month of strong economic performance,” said Pranjul Bhandari, chief India economist at HSBC, reinforcing the view that economic activity remains resilient despite external pressures.
However, this domestic strength is tempered by significant challenges in the global trade arena, particularly with the United States, India’s largest trading partner for the fourth consecutive year in 2024-2025. The U.S. has imposed a 10% ad valorem baseline tariff on Indian goods exports, increasing the effective trade-weighted average most-favored-nation (MFN) tariff rate to 12.2% when added to the 2023 MFN rate of 2.2%. A potential additional 16% differential tariff, currently paused for 90 days, could raise this to 28.2% by the fiscal year’s end, potentially shaving 0.1% to 0.3% off India’s GDP growth. Deloitte’s analysis, based on data from the last eight years (excluding COVID-19 years), indicates that Indian exports to the U.S. are highly price-elastic, with a 1% increase in U.S. import tariffs leading to a 0.7% fall in exports. In contrast, Indian imports from the U.S. are less elastic, with a 1% increase in India’s import tariffs resulting in only a 0.08% decline in imports. This asymmetry suggests that tariff hikes could significantly dent India’s trade surplus, with Deloitte estimating a 12.8% reduction under the current 26% tariff scenario, or up to 19.6% if exemptions on products like petroleum, semiconductors, pharmaceuticals, and gold are lifted.
The RBI, however, sees a silver lining in India’s geopolitical positioning. “India is increasingly positioned to function as a ‘connector country,’” the central bank stated, suggesting that India could benefit from realignments in global supply chains. RBI Governor Sanjay Malhotra emphasized that India’s lower reliance on exports and strong domestic demand make it a “natural choice for investors seeking long-term value and opportunity.” This perspective is echoed in the ongoing trade negotiations with the U.S., with Commerce Minister Piyush Goyal noting on X that discussions are moving “towards expediting the first tranche of [a] India-U.S. Bilateral Trade Agreement.” A potential agreement could mitigate tariff impacts, particularly if India reduces its import tariffs to zero, potentially lowering U.S. tariffs on Indian exports to 16.2%. Such an outcome could boost India’s exports in sectors like textiles and electronics, where it holds a competitive edge, especially if competitors face steeper tariffs post-pause.
Yet, the economic landscape is not without its warning signs. The Union Bank of India projects a significant slowdown in industrial output, with the Index of Industrial Production (IIP) expected to grow by just 1.2% year-on-year in April 2025, down from 3% in March, due to weaknesses in mining and manufacturing exacerbated by global trade uncertainties. This slowdown could hinder export-oriented sectors, further complicating India’s growth narrative. Additionally, foreign direct investment (FDI) presents a mixed picture. While gross FDI inflows rose 13.7% to $81 billion in 2024-2025, net FDI plummeted 96% to $0.4 billion, a decadal low, due to a 15% increase in repatriation and divestment by foreign companies ($51.5 billion) and a 74.8% surge in outward FDI by Indian firms ($29.2 billion). The RBI views this as a sign of a mature market, stating, “This is a sign of a mature market where foreign investors can enter and exit smoothly, which reflects positively on the Indian economy.” However, critics argue that the sharp decline in net FDI signals waning investor confidence, with a Mumbai-based fund manager bluntly stating, “Things are not looking good.”
Rishi Shah of Grant Thornton Bharat offers a balanced view, describing the situation as an “FDI paradox.” He notes that the $81 billion in gross inflows reflects confidence, but the $0.4 billion in net flows indicates “global prudence” amid geopolitical uncertainty. “When the world feels unstable, even good stories get parked in cash until visibility improves,” Shah explains, cautioning that FDI flows may remain slow as investors navigate the new global reality. This uncertainty is compounded by questions about the reliability of India’s GDP data. The NITI Aayog’s claim that India has surpassed Japan to become the fourth-largest economy, based on IMF projections of $4,187.017 billion in nominal GDP for 2025-2026, hinges on a razor-thin 0.014% margin over Japan’s $4,186.431 billion. Critics argue that the IMF’s reliance on Indian government data, which has faced scrutiny for errors since the 2016 demonetization and subsequent shocks like GST, the NBFC crisis, and the 2020 lockdown, undermines the projection’s credibility. The methodology’s dependence on organized sector data as a proxy for the declining unorganized sector further skews estimates, potentially overinflating GDP figures while masking unemployment challenges.
Deloitte’s projections account for these dualities, offering both optimistic and pessimistic scenarios. The optimistic scenario assumes clarity in trade policies by late 2025, political stability, and continued reforms, with crude oil prices remaining range-bound at $70 per barrel and the RBI easing monetary policy to boost credit growth. The pessimistic scenario, however, envisions prolonged trade uncertainty, supply chain shocks, and tighter monetary policies, potentially pushing major economies into recession. Despite these risks, Authors at Deloitte remain cautiously optimistic, banking on India’s strong domestic demand and potential trade agreements to sustain growth. The resolution of trade uncertainties, particularly with the U.S., could enhance India’s export competitiveness, while domestic policies like tax exemptions continue to fuel consumer spending. Yet, the fragility of global trade networks and domestic data reliability issues demand a tempered outlook, as India strives to balance its economic ambitions with the realities of an uncertain world.
 With reporting by Deloitte Insights, ET CFO, The Telegraph India, and The Wall Street Journal

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