Tariff shocks and tailwinds

The global tariff war poses risks but also offers India a chance to position itself as a go-to destination for firms shifting from China

- JANAK RAJ

Tariff measures announced by the United States (US) on April 2 (later suspended until July 9), along with countermeasures — especially by China — are a major negative shock to the global economy. The International Monetary Fund (IMF) now projects global growth to slow to 2.8 per cent in 2025, down from the 3.3 per cent forecast in January. India will also be adversely affected, though not to the same extent as many other major emerging market economies (EMEs). The Indian economy is largely driven by domestic demand, with total exports to the world and the US constituting 22 per cent and 2 per cent of its gross domestic product (GDP), respectively. These shares are lower than those of many other EMEs. The IMF has revised India's growth forecast downward by 30 basis points to 6.2 per cent for 2025-26.

A slowing down of the global economy and growing uncertainty have given rise to some other risks for the Indian economy. First, a major casualty of the ongoing tariff war could be the domestic private capital expenditure (capex) cycle, which was beginning to show some signs of revival after remaining depressed for several years. In an environment of weakening global demand and heightened uncertainty, corporations may now further delay their investment plans. This would adversely affect India's growth prospects, as well as make it more challenging to improve general government finances and reduce the debt-to-GDP ratio to a sustainable level.