We are living in a time of heightened uncertainty, and expect that uncertainty to weigh on economic activity. But against this backdrop, India presents the best growth opportunity in Asia.
While investors seem to be taking comfort - first, in the pause of Trump's 'reciprocal' tariffs, then in lowering of US tariffs on China - this is more reprieve than relief. Getting to a trade deal with the US will be difficult particularly for China, and potentially for Europe, as the multitude of issues will mean that negotiations will be complex and will likely take time.
A deal with the two major trading blocs will be critical to lower uncertainty. As long as uncertainty persists, it will keep weighing on corporate confidence, capex and trade. As it relates to this week's ruling of the US Court of International Trade blocking imposition of 'reciprocal' tariffs, the Trump administration has already indicated that it will appeal, and may yet consider other avenues through which it may still impose tariffs.
For India, starting point of the lowest ratio of goods exports to GDP means it's the least exposed to trade tensions within Asia. Moreover, work has already proceeded well on negotiating a trade deal. India seems well-positioned within the region to secure such a deal.
Meanwhile, domestic demand is recovering after a period of slowing last year. Both fiscal and monetary policies are supportive and can do more to support growth as needed. On the fiscal side of things, rebound in capex is supporting growth.
On monetary policy, RBI has cut rates, injected liquidity into the banking system, and lightened up on regulations that were constraining non-bank credit. There should be more rate cuts, given that macro stability, especially inflation, is very much in control and will stay within the central bank's target range. The weak dollar environment, which should persist, and lower oil prices, are also factors that will support India.
At the same time, India will be one of the economies which can benefit from supply chain diversification. It has already been making concerted efforts since 2019 to lift its participation in global value chains and raise its manufacturing exports. These efforts are bearing fruit, as supply chains, especially those in electronics manufacturing, are shifting to India, with more domestically produced content.
GoI has laid the foundation, principally through increased investment in infrastructure and in providing a PLI scheme. This has also helped to catalyse an increase in overall investment, which will be beneficial for employment creation. In the next stage of attracting more investment in manufacturing capabilities, state and local governments will have to play a crucial role in systematically improving the ease of doing business at the state level.
While worry about drag from goods trade lingers, a strong engine of growth has been quietly emerging. Investors should not underestimate the strength in services exports and their role in helping to secure strong growth for India.
Importance of India's services exports has risen significantly over the last four years. They have doubled since December 2020, and value addition in them is much higher than in goods exports. Services exports have now reached $410 bn on a 3-month trailing sum annualised basis in April, close in size to the $445 bn of goods exports. This rising structural trend is a result of two important trends:
India has continued to gain services export market share.
There is added momentum from a rise in market share in an environment where digitalisation is expanding the addressable market.
Both these factors should ensure that the rise in this sector will be more defensive, even in an environment where global growth is slowing.
The strength in India's economy, buttressed by domestic demand and uptrend in services exports, means that India will be one of the fastest-growing economies in a world that is currently starved of growth. Medium-term growth averaging 6.5% is still expected. By 2028, India should contribute about one-fifth of global real GDP growth (vs 16% in 2024) and to overtake Germany as the third-largest economy in nominal dollar GDP terms.
While 6.5% growth over the medium term may offer a compelling growth opportunity for investors, this pace will, however, not be able to generate enough jobs to fully absorb the labour force growth. Policymakers are already making efforts to target stronger growth, and shifting the growth mix towards the industrial sector, which will help.
But considering the magnitude of the jobs problem, there is an urgent need to accelerate the pace, and do more. A comprehensive reform package will be needed, including accelerated build-out of public infrastructure, especially for last-mile connectivity, as well as a systematic approach that incentivises state governments to improve the business environment and ensure the labour force is adequately skilled.
If this is not achieved, it could lead to a vicious loop in which a rise in social stability pressures can lead policymakers to take up redistribution efforts again. This would bring back macro stability risks.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
While investors seem to be taking comfort - first, in the pause of Trump's 'reciprocal' tariffs, then in lowering of US tariffs on China - this is more reprieve than relief. Getting to a trade deal with the US will be difficult particularly for China, and potentially for Europe, as the multitude of issues will mean that negotiations will be complex and will likely take time.
A deal with the two major trading blocs will be critical to lower uncertainty. As long as uncertainty persists, it will keep weighing on corporate confidence, capex and trade. As it relates to this week's ruling of the US Court of International Trade blocking imposition of 'reciprocal' tariffs, the Trump administration has already indicated that it will appeal, and may yet consider other avenues through which it may still impose tariffs.
For India, starting point of the lowest ratio of goods exports to GDP means it's the least exposed to trade tensions within Asia. Moreover, work has already proceeded well on negotiating a trade deal. India seems well-positioned within the region to secure such a deal.
Meanwhile, domestic demand is recovering after a period of slowing last year. Both fiscal and monetary policies are supportive and can do more to support growth as needed. On the fiscal side of things, rebound in capex is supporting growth.
On monetary policy, RBI has cut rates, injected liquidity into the banking system, and lightened up on regulations that were constraining non-bank credit. There should be more rate cuts, given that macro stability, especially inflation, is very much in control and will stay within the central bank's target range. The weak dollar environment, which should persist, and lower oil prices, are also factors that will support India.
At the same time, India will be one of the economies which can benefit from supply chain diversification. It has already been making concerted efforts since 2019 to lift its participation in global value chains and raise its manufacturing exports. These efforts are bearing fruit, as supply chains, especially those in electronics manufacturing, are shifting to India, with more domestically produced content.
GoI has laid the foundation, principally through increased investment in infrastructure and in providing a PLI scheme. This has also helped to catalyse an increase in overall investment, which will be beneficial for employment creation. In the next stage of attracting more investment in manufacturing capabilities, state and local governments will have to play a crucial role in systematically improving the ease of doing business at the state level.
While worry about drag from goods trade lingers, a strong engine of growth has been quietly emerging. Investors should not underestimate the strength in services exports and their role in helping to secure strong growth for India.
Importance of India's services exports has risen significantly over the last four years. They have doubled since December 2020, and value addition in them is much higher than in goods exports. Services exports have now reached $410 bn on a 3-month trailing sum annualised basis in April, close in size to the $445 bn of goods exports. This rising structural trend is a result of two important trends:
India has continued to gain services export market share.
There is added momentum from a rise in market share in an environment where digitalisation is expanding the addressable market.
Both these factors should ensure that the rise in this sector will be more defensive, even in an environment where global growth is slowing.
The strength in India's economy, buttressed by domestic demand and uptrend in services exports, means that India will be one of the fastest-growing economies in a world that is currently starved of growth. Medium-term growth averaging 6.5% is still expected. By 2028, India should contribute about one-fifth of global real GDP growth (vs 16% in 2024) and to overtake Germany as the third-largest economy in nominal dollar GDP terms.
While 6.5% growth over the medium term may offer a compelling growth opportunity for investors, this pace will, however, not be able to generate enough jobs to fully absorb the labour force growth. Policymakers are already making efforts to target stronger growth, and shifting the growth mix towards the industrial sector, which will help.
But considering the magnitude of the jobs problem, there is an urgent need to accelerate the pace, and do more. A comprehensive reform package will be needed, including accelerated build-out of public infrastructure, especially for last-mile connectivity, as well as a systematic approach that incentivises state governments to improve the business environment and ensure the labour force is adequately skilled.
If this is not achieved, it could lead to a vicious loop in which a rise in social stability pressures can lead policymakers to take up redistribution efforts again. This would bring back macro stability risks.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com)
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