State of the Indian Economy: Navigating Global Uncertainties

 The global economic landscape is rapidly evolving, with trade policy uncertainty emerging as the key driver of the near-term outlook. Recent US tariff announcements have stoked fears of a global trade war, with countries still working out their appropriate responses in this uncertain environment.

Despite these external headwinds, the Indian economy has exhibited marked resilience. Although the weakening global economic outlook could impact overall growth through weaker external demand, India's domestic growth engines - consumption and investment - are relatively less susceptible to external pressures.

Prospects for the farm sector have been boosted by the forecast of an above normal southwest monsoon for 2025, which could augment farm incomes and keep food prices under check. Headline inflation moderated to a 67-month low of 3.3% in March, mainly due to moderation in food prices.

Global Economic Outlook: Trade Tensions and Market Volatility

The global economic landscape is facing significant challenges due to escalating trade tensions. The WTO estimates that global merchandise trade volumes could contract by around 1% in 2025, with an 80% fall in bilateral trade between the US and China. These developments have sent financial markets into a tailspin globally, though markets rebounded sharply after the 90-day pause announcement.

India’s Growth & Resilience

Despite global headwinds, the Indian economy continues to remain resilient on strong domestic growth impulses and sound macro-fundamentals. Consumer confidence has improved sequentially, with the Future Expectations Index strengthening further, indicating an optimistic outlook. High frequency indicators suggest that aggregate demand remained broadly resilient during Q4:2024-25.

Trade Performance: Navigating External Challenges

India's merchandise exports grew by 0.7% year-on-year to US$ 42.0 billion in March 2025 – marking a rebound after four straight months of contraction – driven by a recovery in non-oil exports. Electronic goods, drugs and pharmaceuticals, gems and jewelry, marine products, and rice supported export growth.

Merchandise imports at US$ 63.5 billion expanded by 11.4% year-on-year in March 2025, mainly due to increasing oil, gold and electronic imports. The merchandise trade deficit widened to US$ 21.5 billion in March 2025 from US$ 15.3 billion a year ago.

Services exports grew by 11.6% year-on-year to US$ 31.6 billion in February 2025 due to a rise in exports of software and business services, while services imports contracted by 4.8% year-on-year to US$ 14.5 billion.

Inflation Trends: Moderating Price Pressures

Headline CPI inflation declined to a 67-month low of 3.3% in March 2025 from 3.6% in February, marking the fourth consecutive monthly decline. The decline came entirely from a negative price momentum of around 30 basis points in the absence of any base effect.

Annual inflation in food group decelerated sharply to 2.9% in March. Vegetables, pulses and eggs experienced further deflation, while inflation in cereals, meat and fish, and milk products continued to moderate. High frequency food price data for April so far show a moderation in cereal prices and pulses prices, while edible oil prices have firmed up.

Households' perception of current inflation declined by 50 basis points to 7.8%, while their inflation expectations also eased for both three-month and one-year horizons.

Monetary Policy and Financial Conditions

The MPC recognized that the global economy is going through a period of exceptional uncertainties. It noted that inflation is currently below the target and the domestic inflation outlook provides confidence of a durable alignment of headline inflation with the 4% target over the next year.

The MPC opined that a benign inflation outlook and slackening pace of growth makes it imperative for monetary policy to remain growth supportive. The Reserve Bank has been proactively deploying measures to augment system liquidity, which have helped maintain orderly conditions in the money market.

External Sector: Stability Amid Global Volatility

India's external sector has shown remarkable resilience amid global volatility. As of April 11, 2025, India held foreign exchange reserves worth US$ 677.8 billion, the world's fourth largest, covering about 11 months of imports and 94% of external debt outstanding.

The current account deficit moderated to US$ 11.5 billion (1.1% of GDP) in Q3:2024-25 from US$ 16.7 billion (1.8% of GDP) in Q2:2024-25. Robust growth in services exports alongside higher remittance receipts cushioned the effect of a widening merchandise trade deficit.

India's net international investment position improved, with the ratio of international assets to international liabilities increasing to 74.7% in December 2024 from 73.1% a year ago, highlighting the country's external sector strength.

Outlook: Turning Challenges into Opportunities

Going forward, India is poised to benefit from supply chain realignments, diversified FDI sources, and engagement with global investors seeking resilience and scale. The agricultural sector is expected to sustain its momentum, supported by bumper harvests and higher summer sowing amidst comfortable reservoir positions.

Industrial and services activity continue to remain resilient, with surveys revealing optimism in economic activity supported by moderating inflation, sustained upswing in rural consumption and recovery in urban consumption. India's consistent strength in services exports and remittance inflows continues to provide a vital buffer for the current account.

Calibrated policy support can help India turn global volatility into an opportunity and strengthen its position in the emerging world economic landscape, despite the risks from global uncertainties.

GST and Compensation cess during FY24-25.

 In FY25, India's Goods and Services Tax (GST) collections showed robust growth, with gross collections reaching ₹22.08 lakh crore (a 9.4% increase) and net collections (after refunds) at ₹19.56 lakh crore (an 8.6% increase). 

Here's a more detailed breakdown:

•       Gross GST Collections:

  For FY25, the total gross GST collections reached ₹22.08 lakh crore, indicating a 9.4% year-on-year (YoY) increase. 
• Net GST Collections:
• After accounting for refunds, the net GST collections for FY25 stood at ₹19.56 lakh crore, representing an 8.6% increase from the previous financial year. 
• March 2025 Collections:
• In March 2025, gross GST collections rose 9.9% YoY to ₹1.96 lakh crore, 
• Refunds:
• GST refunds of ₹19,615 crore were given in March, and ₹2.52 trillion were given in the just-ended financial year. 
• Economic Activity:
• The continued rise in GST collections is seen as a positive sign of rising economic activity, better tax compliance, and booming consumption. 
• Budget Estimates:
• The government's budget estimate projected an 11% increase in GST revenues for the year, with total anticipated revenues of Rs 11.78 lakh crore from Central GST and compensation cess. 

  

  he GST Compensation Cess is a critical component of India's GST framework, designed to protect the revenue interests of states during the initial transition to the new tax regime. Here's a summary of its key aspects:

  Purpose

  • Financial Support: To provide financial assistance to states that might experience revenue losses due to the implementation of the Goods and Services Tax (GST).
  • Transition Cushion: To cushion the impact of economic disturbances on states, especially those with a strong manufacturing base, as they transition to a consumption-based tax regime.

  Duration

  • Initial Period: The compensation was initially guaranteed for a period of five years from the rollout of GST on July 1, 2017.

  Rationale

  • Revenue Protection: To ensure states are not adversely affected during the shift to GST, particularly those that heavily relied on pre-GST tax structures.
  • Economic Stability: To maintain economic stability by compensating states for any revenue shortfalls, allowing them to continue funding essential services and development projects.

  The GST Compensation Cess is a mechanism that reflects the cooperative federalism approach in India's tax policy, ensuring that states are supported during significant economic reforms.

• here's a breakdown of the key points regarding the GST Compensation Cess and related decisions as of September 2024:

  Group of Ministers (GoM)

  • Formation: On September 9, 2024, a Group of Ministers (GoM) was formed to analyze the figures and strategize the future of the cess.

  Extension of Compensation Cess

  • Notification: In June 2024, the central government extended the compensation cess on luxury and demerit goods until March 2026.

  Loan Repayment

  • Timeline: The Union Minister stated that the back-to-back loans taken would be repaid, along with the interest, by January 2026.

  Financial Data

  • Total Cess Collection (Actual + Projected) up to March 2025: ₹8,66,706 crores.
  • Compensation Paid until September 5, 2024: ₹6,64,203 crores.
  • Back-to-Back Loans Repayable: ₹2,69,208 crores.
  • Interest on Loans: ₹51,561 crores.

  This information highlights the government's commitment to addressing the financial needs of states and managing the transition to the GST regime effectively. The extension of the cess and the plan for loan repayment indicate a strategic approach to maintaining fiscal stability and supporting states' economic development.

• It is prudent to extend the Compensation Cess mechanism with a new contract with all the States to reduce GST on popular goods and services esp. on Health Insurance.

US Tariffs -path forward for India with BTA and Opportunities available

 Reciprocal tariffs imposed by the U.S. are expected to lead to bilateral negotiations and a significant shift in supply chain models over the coming years. The global economy has long operated under a model of globalization, where production is based on cost efficiency and goods are sold where there is demand. However, the recent tariff changes are prompting a re-evaluation of this integrated supply chain system.

It is acknowledged that altering this established model will not be quick or easy due to challenges such as talent management, sourcing, and the availability of raw materials. As a result, the underlying infrastructure of global supply chains will need time to adapt. It is unlikely that tariffs will revert to zero, as changes once implemented often remain in some form, meaning future trade relations may see tariffs settle at varied levels across different countries.

Despite these challenges, there is optimism regarding India’s economic position, noting that there will continue to be strong demand across various sectors, including healthcare, infrastructure, hospitality, and education, suggesting a robust market potential in the years ahead.

The situation described highlights the complex landscape of global trade relations, particularly in light of the recent tariff impositions by the Trump administration. Here are some key insights and potential implications for India and other countries in this context:

1. Shift in Global Trade Dynamics:

   • The U.S. tariffs represent a significant shift from a rules-based multilateral trading system to a more unilateral approach. This could lead to a reconfiguration of trade agreements and alliances as countries navigate new barriers.

2. Opportunities for India:

   • Bilateral Trade Agreements: As mentioned, a potential bilateral trade agreement between the U.S. and India could facilitate tariff mitigation, increasing India's competitiveness in the U.S. market compared to countries like China and Vietnam.
   • Sector-Specific Discussions: The focus on sector-specific negotiations, especially in technology, defense, and pharmaceuticals, aligns with India’s strengths and could lead to enhanced economic cooperation.

3. Challenges for Smaller Nations:

   • Prime Minister of Singapore’s comments reflect concerns that smaller countries may have limited bargaining power in a world leaning towards bilateral agreements. This could lead to a more fragmented global trade system.

4. Impact on U.S. Domestic Politics:

   • The political divide within the U.S. may influence the long-term sustainability of these tariffs and trade policies. If domestic discontent grows, it could pressure politicians to reconsider their stance on global trade.

5. China’s Response:

   • China’s retaliatory tariffs target U.S. agricultural exports, which could create openings for India to increase its agricultural exports to the U.S., enhancing its trade position.

6. Retaining Technological Leadership:

   • The U.S. interest in technology partnerships with India, as evident from the initiatives like iCET and TRUST, signifies a strategic approach to counterbalance China’s rise in technology sectors. This could present numerous opportunities for Indian companies and sectors involved in critical and emerging technologies.

7. Long-term Global Order Instability:

   • The ongoing tensions and uncertainty could lead to longer-term instability in the global order. Nations may need to adapt to a new reality of trade interactions that prioritize national interests over collective agreements.

   • The imposition of tariffs by the Trump administration created several potential business opportunities for India across various sectors. Here are some areas where India could benefit:

     1. Manufacturing and Export Sectors:

        • Alternative Sourcing: Indian manufacturers can fill the gap left by countries affected by tariffs. This includes textiles, electronics, and machinery.
        • Value Addition: With U.S. tariffs on raw materials, Indian companies can focus on producing finished goods to add value before exporting.

     2. Agricultural Products:

        • India could increase its exports of agricultural products, such as pulses, spices, and tea, as alternatives to U.S. products facing tariffs.
        • Expansion of organic farming and export of organic goods can cater to increasing demand in U.S. markets.

     3. Pharmaceuticals:

        • India is one of the largest producers of generic drugs. With rising prices of pharmaceuticals due to tariffs, U.S. companies may seek cheaper alternatives from India.

     4. Information Technology and Services:

        • The IT sector can seize the opportunity to provide services to companies looking to diversify their supply chains and reduce dependency on tariffs.
        • Business process outsourcing (BPO) can gain traction as firms look to cut costs.

     5. Renewable Energy:

        • As the U.S. focuses on domestic production, India can enhance its renewable energy sector, attracting investment in solar, wind, and other green technologies to export technology and services.

     6. Textiles and Apparel:

        • India can increase its textile and apparel exports to the U.S. as a substitute for products from countries facing steep tariffs.
        • Fashion brands can partner with Indian manufacturers to ensure compliance with U.S. consumer preferences and standards.

     7. Diversifying Supply Chains:

        • Indian companies can offer alternative supply chain solutions to U.S. businesses affected by tariffs on Chinese goods.

     8. Collaborations and Investments:

        • Strengthening trade and investment collaborations with U.S. firms to develop joint ventures or localization of production in India can be a strategic move.

     9. Skill Development and Infrastructure:

        • Investing in skill development and infrastructure can enhance India's appeal as a manufacturing hub, attracting U.S. businesses looking for new bases.

     To capitalize on these opportunities, India can focus on enhancing its diplomatic relations, improving trade agreements, and investing in sectors with high growth potential. Engaging with U.S. businesses through trade fairs and forums can also facilitate market entry and partnership.

   • A mutually beneficial, multi-sector Bilateral Trade Agreement (BTA) between the USA and India would represent a significant step in enhancing economic ties and addressing trade disparities. Here are some potential benefits and focus areas for such an agreement:

     Potential Benefits

     1. Increased Market Access:

        • A BTA would provide Indian companies with greater access to the U.S. market, reducing tariff barriers and allowing for more competitive pricing on Indian goods.

     2. Diversification of Supply Chains:

        • Establishing stronger trade relations would help both countries diversify their supply chains, reducing dependency on specific countries, particularly given the current geopolitical tensions.

     3. Investment Opportunities:

        • Lower tariffs and improved trade relations could encourage U.S. investments in India, particularly in sectors like technology, manufacturing, and services.

     4. Job Creation:

        • Enhanced trade and investment could lead to job creation in both countries, contributing to economic growth and stability.

     5. Strengthening Strategic Partnership:

        • A BTA would not only boost economic ties but also solidify the strategic partnership between the U.S. and India, particularly in the context of countering China's influence.

     Focus Areas for the Agreement

     1. Technology and Innovation:

        • Cooperation in critical and emerging technologies like AI, semiconductors, and renewable energy could be a key component, aligning with initiatives like iCET and TRUST.

     2. Agriculture and Food Products:

        • Reducing barriers on agricultural imports and exports can be mutually beneficial, providing the U.S. with diverse food products while allowing India to export its agricultural goods.

     3. Healthcare and Pharmaceuticals:

        • Streamlining regulations and reducing tariffs on pharmaceuticals could enhance access to medicines and healthcare solutions, benefiting both nations.

     4. Manufacturing and Trade in Goods:

        • Promoting manufacturing and reducing tariffs on goods could enhance competitiveness, especially given the context of existing tariffs on other nations.

     5. Services Sector:

        • Focusing on the services sector, including IT and business process outsourcing, can facilitate greater market access and collaboration between the two economies.

     6. Environmental and Sustainable Practices:

        • Including provisions for environmental sustainability and cooperation in areas like clean energy could strengthen the agreement’s appeal and align with global sustainability goals.

Passenger vehicles sales trend is encouraging for the Economy

 The Federation of Automobile Dealers Associations (FADA) released its vehicle retail data for March 2025 and the full fiscal year 2024-25 (FY 24-25), reflecting the performance of the Indian automobile retail sector. Based on available insights, overall vehicle retail sales in FY 24-25 showed a growth of 6.5% compared to FY 23-24, with total sales reaching 26 million units, up from 24.5 million units the previous year. This growth was driven by a 5% increase in passenger vehicle sales, an 8% rise in two-wheeler sales, and a 5% uptick in commercial vehicle sales, though March 2025 itself saw a slight year-on-year decline of 0.7% due to early-month weakness offset by festive demand later.

10 year Trend showing correlation between India's Steel Production and India's Passenger vehicles sale:

Courtesy: Trading Economics,March 2025

For March 2025 specifically, sales were influenced by a mix of factors. The month started slowly due to the Kharmas period, but a strong recovery occurred in the last week, fueled by festivals like Navratri, Gudi Padwa, and Eid, alongside year-end buying spurred by depreciation benefits. Passenger vehicle sales in March showed resilience despite a high inventory level of 50–55 days, while two-wheeler sales dipped by 2% year-on-year, and commercial vehicles posted a moderate 2.68% growth. The electric vehicle segment also saw activity, with 9,503 electric passenger vehicles sold in March 2025, reflecting a modest 7.5% year-on-year growth.

Overall, FY 24-25 marked a positive year for vehicle sales in India, with rural demand and festive periods playing key roles, though challenges like high inventory and uneven demand pockets tempered the performance in March.

Key Highlights:

• FY25 Overall Growth: The auto retail sector showed adaptability with an overall growth of 6.46%. Passenger Vehicles (PV) grew by 4.87%, closely matching initial forecasts. Two-Wheelers (2W) grew by 7.71%, while Commercial Vehicles (CV) remained nearly flat at -0.17%.
• Rural vs. Urban Performance: Rural markets outperformed urban areas in 2W, 3W, and PV sales, indicating stronger demand in rural regions.
• March 2025 Retail Sales: Overall retail sales declined by -0.7% YoY but improved by +12% MoM, driven by a late-month surge due to festivals and year-end benefits.
• Dealer Concerns: Dealers expressed concerns over high OEM-set targets, rising inventory levels, cautious lending, and upcoming OBD2-related price hikes.
• Near-Term Outlook (April): A cautious optimism prevails, with nearly half of dealers expecting flat sales and a significant percentage reporting weak booking pipelines.
• Long-Term Outlook (FY26): FADA anticipates mid to high single-digit growth in 2W and low single-digit growth in PV and CV, with new model launches and improved rural incomes as key supportive factors.
• EV Market Share: The EV market share is also detailed, showing the percentage of EV sales compared to total sales in each vehicle category.

Additional Points:

• It also highlights the challenges and headwinds faced by the auto retail sector, such as financing constraints, global tariff wars, and consumer sentiment.
• The data is collated in collaboration with the Ministry of Road Transport & Highways, Government of India, gathered from a significant number of RTOs across the country.