It was not surprising when the International Monetary Fund (IMF) and the World Bank cut India’s growth projection by 30 basis points (bps) to 6.2 per cent and by 40 bps to 6.3 per cent for 2025-26, respectively, due to higher trade tensions and global uncertainty.
Many research firms and rating agencies have recently also cut India’s growth estimates by 20-60 bps for 2025-26, citing the same reasons.
The adverse direct and indirect impact of global uncertainties on India’s export growth was cited as a major drag on growth if India does not respond with suitable policies to neutralise this impact.
In anticipation of global uncertainties, India has proactively taken several steps, including income tax rate cuts and a hike in annual tax-free income limit to Rs 12,00,000 from Rs 7,00,000. That would leave around Rs 1 lakh crore extra money in the hands of citizens to spend or save in 2025-26, potentially giving consumption and investment a boost. This has been supplemented by a 50 bps policy interest rate cut by the Reserve Bank of India (RBI) since February. The Centre’s investment is also pegged at a record high of Rs 11.2 lakh crore in 2025-26.
Unlike China, India’s growth has remained dependent on domestic growth drivers, and it can sustain a growth of 6.5 per cent in 2025-26 using monetary and fiscal policies. So, in a fast-changing global environment, the RBI can possibly reduce interest rates by another 100-150 basis points in 2025-26 to bring down the cost of funds for business and households to boost consumption and investment in a meaningful way.
This is doable given that retail (CPI) inflation has hit a 67-month low of 3.34 per cent in March 2025 due to a sharp correction in food inflation, which bodes well for lowering the average CPI headline forecast for 2025-26 below 4 per cent now. With Nominal GDP growth is expected to be in the range of 9-9.5 per cent for 2025-26 as against the budget estimate of 10 per cent, the economy is in a Goldilocks period to slash the policy rates, taking advantage of the low growth and low inflation. With crude prices at around USD 60/bbl is a huge 25 per cent discount in a matter of three months for India and would aid in further cooling inflation.
It is to be noted that the RBI raised repo rate by 250 bps since May 2022 till January 2025, with banks also raising their repo-linked external benchmark-based lending rates (EBLRs) up by a similar magnitude. On the deposit side, the weighted average domestic term deposit rates on fresh and outstanding deposits increased by 253 bps and 199 bps, respectively, during the same period
In response to the 50-bps cut in the policy repo rate since February 2025, banks have reduced their repo-linked EBLRs by a similar magnitude. So, the transmission of policy rates is happening and is crucial to boost domestic levers of growth. India is navigating a challenging external environment, including a potential conflict with Pakistan.
On the external front, some good news has also started to flow in with the finalisation of the India-UK Free Trade Agreement (FTA). The much-awaited India-UK FTA was finally agreed on 6th of May which is expected to boost trade between the two nations. Sectors such as textiles, gems and jewellery and auto components are expected to benefit from this trade agreement. Under the deal with the UK, New Delhi will get duty-free access to 99 per cent of merchandise shipments into the island nation. The benefit for Indian industry will be substantial in product categories like chemicals, textiles and clothing, leather & footwear, gems & jewellery and base metals, where the UK tariffs are relatively high.
By September or October, the first phase Bilateral Investment Treaty (BIT) with the US is also likely to conclude, giving Indian manufacturers headroom to export to the world’s largest market without any tariff.
This would be followed by the proposed FTA with the European Union. These three deals would be enough for India’s manufacturing to fire up. Indian companies, including MSMEs, would have greater access to the advanced economies’ markets, requiring them to invest and expand capacity. A benign interest rate regime would help firms to step up borrowing for investment purposes.
With the right strategies in place, continued domestic reforms, and a strong focus on infrastructure development and job creation, India can demonstrate resilient growth despite global uncertainties.
Given the aggressive tariff measures by the US against China for unfair trade practices, global trade disruptions will likely open up opportunities for India with the “China Plus One” strategy gaining a higher sense of urgency for developed nations.
“China Plus One” strategy refers to businesses diversifying their operations beyond China, often while still maintaining a presence there. India has been trying to be at the forefront to gain from this strategy by pursuing a BTA with the US.
Since coming to power in January, President Donald Trump has aggressively used tariffs to balance US trade with the world by seeking greater access to American goods in world markets. He has already announced reciprocal tariffs on all economies, including India, but later paused them.
In 2018, when the then Trump administration undertook tariff action against China, the ‘China Plus One’ became ‘China Plus Five’ with Vietnam and Cambodia as major beneficiaries, while India was the distant fifth beneficiary.
This time around, India wants to see the ‘China Plus One’ truly becoming ‘China Plus India’. The US trade restrictions on China, as well as on Vietnam and Cambodia, due to stricter rules of origin norms, could place India in a favourable position in the context of global trade.
When the rest of the world ‘s growth rate is retreating at a faster pace than India’s, another piece of good news has come that India will overtake Japan to become the fourth-largest economy with a gross domestic product (GDP) of USD 4.187 trillion at current prices, marching ahead of Japan’s GDP of USD 4.186 trillion in 2025, according to the International Monetary Fund’s latest forecast.
All these positive factors bode well for India, which needs to create annually 8 million jobs to accommodate the rising workforce to become higher higher-income country.