Globalisation — the free flow of goods, services, labour, capital and ideas — has been incontrovertibly beneficial for India, lifting its average annual growth rate to nearly 6.5 per cent since the early Nineties (from 3.5 per cent during 1950-1990) and per capita GDP from $320 to $2,500. While international trade in goods may have slowed down since 2010, the other components of globalisation haven’t, at least until recently. In fact, India’s export of services, particularly software and back-office/business support operations through global capability centres, has boomed in the past decade, even as it has remained the top global recipient of remittances and continued to attract capital flows. But this phase of globalisation-aided growth is increasingly facing challenges, if not coming to an end. It’s something India must be prepared for.
The International Monetary Fund expects world goods and services trade to grow by just 1.7 per cent in 2025 and 2.5 per cent in 2026, down from its projections of 3.2 per cent and 3.3 per cent in January. The fall is even more relative to the 5.8 per cent average annual increase between 1995 and 2023, as per the World Trade Organisation’s estimates. The worry, moreover, is that this cannot be attributed to a one-off event (like the Covid-19 pandemic) or impersonal forces (the 2008 global financial crisis). Instead, the drivers are more structural and policy-induced, entailing a reordering of the geopolitical landscape — and coming mainly from a country that was the greatest proponent of free markets, liberalisation and deregulation. When the US under President Donald Trump raises its average effective tariff rate to 28 per cent — the highest since 1901, according to Yale University’s Budget Lab — and ratchets up a trade war with the world’s second largest economy, China, it is no ordinary shock. It upends the twin assumptions of comparative advantage and doux commerce on which globalisation thrived.
The slowing down of that engine will definitely hurt India, and maybe even shave a percentage point or more off its near-term GDP growth. The overall uncertain global economic environment, whether to do with Trump’s trade policies or fears of Chinese dumping, could dampen investment and hiring plans by businesses. Escalating tensions with Pakistan, post Pahalgam, aren’t going to help either. The only consolation is India’s reasonably sound macroeconomic stability indicators. Annual consumer price inflation, at 3.3 per cent in March, is the lowest since August 2019. Forex reserves are at a six-month high of $686 billion after depleting to below $625 billion in mid-January. The rupee has also recovered to 85.4 to the dollar, from the near-88 lows of only two-and-a-half months ago. The focus should now be on reforms to improve the ease of doing business and reduce compliance burdens. These would pay off when the tide turns again in favour of globalisation.
