Opinion External risks to India’s growth momentum require deft handling

In recent assessments of the world economy, agencies such as the World Bank and the International Monetary Fund have lowered their expectations of global growth this year, with trade policy shocks and geopolitical tensions affecting economic momentum. The IMF has, for instance, projected world growth at just 2.8 per cent in 2025, down 50 basis points from its assessment in January. The World Bank has pegged growth to slow down even further to 2.3 per cent this year, with most economies expected to witness a deceleration compared to last year. In the midst of this marked deterioration, the Indian economy is broadly expected to maintain its growth momentum.

The RBI had pegged growth for the year at 6.5 per cent, in line with the pace last year. In the recent State of the Economy report, economists at the RBI note that the high-frequency indicators for May point towards economic activity being “resilient”. There are several points to note. For one, the agricultural sector appears to continue to fare well. According to the report, conditions have been “largely favourable” for good sowing in the ongoing kharif season. This bodes well for rural demand. The finance ministry’s monthly review also says that “rural demand has strengthened further, supported by a healthy rabi harvest and a positive monsoon outlook”. Alongside, capacity utilisation in the manufacturing sector remains “above its long-period average”, and other high-frequency indicators such as E-way bills, toll collections and digital payments also point towards “strong growth”.

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But the performance of some other non-agri indicators suggests that, overall, it’s a mixed trend. The index of industrial production rose by just 2.7 per cent in April, and the eight core sectors — coal, steel and cement, among others — grew by only 0.8 per cent during April-May. According to a note from ICRA, eight key indicators saw a deceleration in the same period. These include electricity generation, two-wheeler production, port cargo traffic and domestic airline passenger traffic. The RBI report notes that there are signs of moderation in urban demand. The finance ministry’s report also acknowledges “signs of softening in areas like construction inputs and vehicle sales”. Exports are another area of concern. Merchandise exports are up only 3 per cent in the year so far. Excluding petroleum, growth is better. But an uncertain trade environment and weak global demand hang heavy. As per the IMF, world trade is expected to grow at just 1.7 per cent this year, down 1.5 percentage points from its earlier assessment. The finance ministry’s report also says the “external challenges could potentially impact India’s growth trajectory”. This will call for deft handling.