Rising global uncertainties threaten exports, and economic growth: Finance Ministry

Global tensions, trade policy uncertainties, volatile commodity prices and financial market fluctuations pose significant risks to global and domestic growth, the Union finance ministry said, at a time when India is working to limit the impact of US tariff actions.

In FY25, India’s exports slowed due to tariff-related developments across multiple countries, increasing trade risks and disrupting global investment and trade flows, the ministry said in the economic review for February released on Wednesday.

"The Global Trade Policy Uncertainty Index rose to a record high of 237.4 in Q4 2024. Tariff-related developments in multiple countries have heightened trade-related risks, affecting investment and trade flows globally. Consequently, India’s exports have recorded softer growth thus far in FY25. However, a robust services trade surplus continues to offset the impact of lower growth in merchandise exports," the review said.

India’s goods exports rose a tepid 1.39% year-on-year to $358.91 billion in April 2024–January 2025, while imports grew 7.43% to $601.90 billion, leaving a trade deficit of $22.99 billion as of January 2025, according to commerce ministry data.

In addition to slowing global trade and an economic slowdown in advanced economies, US President Donald Trump's reciprocal global tariffs could further disrupt several markets, including India.

Also read | Trump's tariffs cloud India's March exports

In October, the WTO revised its 2024 global goods trade growth forecast slightly upward to 2.7% from 2.6%, but lowered the 2025 estimate to 3% from 3.3%, citing weaker-than-expected demand in Europe but stronger performance in Asia. However, this was before the US announced the global reciprocal tariffs.

Recently, Reuters reported that the Centre estimates such reciprocal tariffs could hit 87% of India's total exports to the United States worth $66 billion. However, both nations are currently negotiating a trade deal, which could soften the impact of such tariffs.

"The budget has also posited agriculture, MSMEs, Investment and Exports as engines of growth, outlining initiatives under each of them, thereby generating optimism about continued resilience in the economy amidst geo-political constraints," the February review added.

Read this | India and US move forward with bilateral trade agreement, but no talks on reciprocal tariffs

The report also said stable commodity prices and robust private sector capital formation, driven by India’s strong fundamentals, will boost growth in FY26.

"Supportive fiscal measures, accommodative monetary policy, and the Union Budget’s focus on longer-term development drivers and reform will bolster domestic economic resilience amidst significant global uncertainties," it added.

Slowing economic growth

India's growth has slowed down considerably from last fiscal, though it remains the fastest-growing major economy. Real GDP grew by 8.2% in FY24 (2023-24) and is estimated to grow by 6.5% in FY25 (2024-25), according to the National Statistical Office (NSO).

To be sure, India’s economic growth picked up in the December quarter (Q3, FY25), with GDP expanding 6.2%, recovering from a low of 5.6% in the previous quarter, reporting the slowest quarterly growth since Q4FY23, barring Q2. Achieving the revised full-year growth target of 6.5%, as projected by the NSO, will need stronger momentum, requiring 7.6% in the final quarter of the year to align with the second advance estimate.

As things stand, the third quarter’s growth was supported by government spending and consumption amid festive demand.

Key levers of the economy — exports, consumption, investments -- along with sectors like manufacturing, agriculture, construction, and services—need to fire on all cylinders to drive growth and sustaining momentum in the final quarter.

Also read | State borrowings to surge about 18% in Q4 after slowing Q2 GDP growth

To be sure, the total investments made in the economy, represented by the gross fixed capital formation (GFCF), slowed to 5.7% in Q3, FY25 down from 5.8% in Q2 and 9.3% in the year-ago period.

However, private final consumption expenditure (PFCE), a proxy for private consumption, grew 6.9% in the December quarter, up from 5.9% in Q2 and 5.7% a year ago, while government final consumption expenditure (GFCE) surged 8.3%, rebounding from 3.8% in Q1 and -0.5% in Q2, reflecting higher government spending. Key levers like agriculture, manufacturing, and exports reported growth during Q3, FY25, compared to the previous quarter.

According to the latest HSBC flash survey, India’s private sector showed signs of softening in March due to slower growth in the services sector; manufacturing, however, remained resilient, reporting strong growth. The HSBC PMI Output Index (manufacturing) rose to 60.6 in March—its highest level since July 2024.

Hopes of revival

Economist Poonam Gupta, director general of the National Council of Applied Economic Research (NCAER), noted in a recent report that despite global headwinds, several high-frequency indicators signal a nascent turnaround in the Indian economy, reflected in improvements in the manufacturing PMI, GST collections, and both EV and non-EV sales.

"Moderation in inflation has opened up more policy space. The agriculture sector is also exhibiting much-needed resilience, which bodes well for both inflation control and rural push to the economy," she said.

India’s retail inflation fell to a seven-month low of 3.61% in February, down from 4.26% in January, driven by slower food price growth, raising hopes of an interest rate cut. Food inflation eased to 3.75% in February, down from 5.97% in January.

And read | Fall in Q1 GDP growth no cause for alarm, say experts, predict 7% growth in FY25

“Exports will face pressure from US actions and weakened global demand, but the impact will be felt more in FY26. Meanwhile, consumption and investment are expected to strengthen, aided by RBI’s support on interest rates, the central government’s efforts to meet the fiscal deficit target, and the income tax exemption,” said Bhanumurthy N.R., director, Madras School of Economics.

He added, “Economic activity is expected to pick up in the last two quarters, helping achieve the 6.5% GDP growth target, with room for an upward revision. Most challenges, however, will stem from external factors."