India's Growth Story Challenged By Global Headwinds

Though positives such as the now-in-the-works Bilateral Trade Agreement (BTA) with the USA, and a raft of trade pacts with the EU, Gulf countries and the UK, besides India's own internal market, is expected to act as a counter to the growth depression that world is staring at. 

Among other agencies, the International Monetary Fund (IMF) revised India's GDP growth rate downwards to 6.2 per cent, from its 6.5 per cent estimates in January, in its April edition of the World Economic Outlook (WEO).

"The government has estimated that GDP will grow by 6.5 per cent in this financial year, and I feel that this is correct, as the RBI and Finance Ministry have taken into account the possible impact of Trump tariffs and the ensuing trade wars on our economy, while lowering their own growth projections," N Bhanumurthy, Director, Madras School of Economics told The Secretariat. 

The economist contended that the RBI's two rounds of rate cuts and the planned BTA with the US would help prop up growth figures despite the global gloom. "The renewed China Plus One strategy, being adopted by many countries in the wake of the new tariff war, can also be expected to divert capital flows towards India. This, too, should help protect GDP growth here," Bhanumurthy added.  

Higher levels of trade tensions and global uncertainty are cited as the main reasons behind this downgrade. Of course, it was a no-brainer that even with a 90-day pause, the Trump tariffs will have an impact on the growth forecasting.

The IMF, however, noted that India's growth outlook is relatively more stable. Stability is expected to be supported by a revival of private consumption, particularly in rural India.

The IMF’s latest revision of India’s growth is in line with the World Bank, Moody’s, S&P, Fitch and OECD estimates. The Asian Development Bank (ADB), in September 2024, had projected a robust Indian economic growth, with a 7.2 per cent projection in 2025-26. However, that was before the current trade turmoil set in.

RBI Still Optimistic About India’s Growth

The RBI, on the other hand, is quite optimistic about India’s economic growth in 2025. In its April 2025 Monetary Policy Committee (MPC) meeting, the apex bank maintained that the projected real GDP growth rate in 2025-26 will be 6.5 per cent.

The optimism continues in the latest version of the RBI Bulletin in April 2025. India’s strength to withstand current global headwinds, according to the RBI, is likely to come from a strong macroeconomic framework and moderating inflation, with all domestic engines firing all cylinders.

Bumper kharif and rabi harvests, and higher summer sowing with comfortable food reserves, should make Indian agriculture sustain its momentum. The challenges in the agri sector mainly come from the rise in temperatures and the likelihood of heatwaves in the current summer season. So, policymakers have to monitor the months between April and June.

The RBI estimates that industries and services are likely to remain resilient. The optimism in steady economic activity is expected to be supported by moderating inflation, sustained upswing in rural consumption and a recovery in urban consumption.

The central bank, however, recognised global uncertainties as downside risks to this outlook in the early-April MPC meeting. It has urged for a decisive policy support to counter that.

For boosting the economy, further interest cuts are also on the table for the apex bank. This may become necessary if capital inflows and remittances are adversely affected due to the tariff war or tensions in the neighbourhood.

The monetary policymakers project India to benefit from supply chain realignments, diversified FDI sources, and engagement with global investors seeking resilience and scale.

The real catch, though, will be in consolidating already established trade linkages. Services exports and remittance inflows are likely to continue, and provide a vital buffer for the current account.

However, a calibrated, dynamic and flexible policy support is necessary for India to transform the global volatility into an opportunity and strengthen its position in the emerging world economic landscape.

IMF Sees India’s Demographic Dividend Waning After 2050

In IMF estimates, China and India together account for almost 50 per cent of the total GDP of emerging market economies. So, a good Indian performance in calendar year 2025 will help global growth as well.

Away from the trade front, India may face challenges in the global capital market. The integration of India (and even China) into global capital markets is far from being perfect.

The IMF feels that this imperfection may result in a difference between domestic and global interest rates. The multilateral agency, therefore, implicitly suggested credit and capital market reforms in India.

With appropriate reforms in place, the difference in interest rates is likely to decline gradually. The agency prescribes strengthening governance and institutions, and greater integration with global financial markets.

Within the group of emerging markets and developing economies, China may witness a sharp decline in its GDP growth during 2025-50. The IMF attributes this projection to “acutely adverse demographics” and “the approaching end of the era of rapid catch-up to frontier productivity”.

For India, however, there are silver linings in the longer-term growth estimates. Compared to other emerging economies, India has a relatively favourable short-term demographic advantage. This will translate into a smaller growth decline between 2025 and 2050 for India than for other emerging markets.

Beyond 2050, India is estimated to pass its demographic turning point, which will result in an intensified decline in the next 50 years. That is the point when India’s rising elderly population is projected to start pulling back economic growth.