India must accelerate reforms to withstand global economic headwinds

Makingsense of India’s economic indicators is increasingly difficult, with positives and negatives almost evenly poised. In the second quarter, the gross domestic product (GDP) rose 8.2 per cent, following a 7.8 per cent expansion in the preceding April-June quarter. On Monday, the Asian Development Bank (ADB) upwardly revised its growth forecast for India to 7.2 per cent.

Furthermore, shedding years of diffidence and misgivings about foreign trade, New Delhi is diligently working on foreign trade agreements (FTAs). India signed an FTA with the UK this summer. Earlier, in March 2024, we signed the Trade & Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA), comprising Switzerland, Norway, Iceland, and Liechtenstein. Effective from October this year, TEPA has the potential to enhance India’s trade relations with Europe. It is also projected to attract $100 billion in investments in India, which can create employment for a million jobs over the next 15 years.

Similarly, talks for a trade deal with the United States seem to be gathering momentum; Prime Minister Narendra Modi and US President Donald Trump talked over the phone on Thursday. The two leaders reportedly reviewed progress in the bilateral partnership and discussed expanding cooperation in key areas, including trade, critical technologies, energy, defence, and security. A day earlier, an FTA with the European Union is on the cards. Commerce & Industry Minister Piyush Goyal said on Wednesday that India and the EU are committed to an early conclusion of the deal.

At the same time, there is no dearth of headwinds. Months after Trump imposed a 50 per cent tariff on Indian merchandise exports, Mexico has now increased tariffs on Asian imports. This will result in 5-50 per cent tariffs on goods exported from India; the domestic auto industry will be badly impacted, as Mexico is the third-largest export market for our car companies, with the shipments worth $5.75 billion. Then there is the problem of the falling Indian rupee; it dipped to a record low of 90.52 against the US dollar on Friday. This calendar year, the rupee has declined over 5 per cent against the dollar, becoming the third-worst performer among 31 major currencies. Three factors have been reported for the decline: a soaring trade deficit, strong corporate demand for dollars, and heavy US tariffs of 50 per cent on Indian goods.

In order to minimise the ill-effects of the headwinds, the government must work harder than ever to discard bad policies, end the regulatory cholesterol that clogs investment and innovation, and contain populist impulses that distort resource allocation. Regulatory reform remains a critical need: businesses continue to struggle with compliance burdens, inconsistent enforcement, and unpredictable policy signals from various levels of government. Reducing these frictions would make India a more attractive destination for both domestic and foreign investors.

Equally important is resisting the temptation of populism, whether in the form of fiscally unsustainable subsidies, retrospective regulatory tinkering, or protectionist reflexes. At a time when global supply chains are being reshaped and countries are competing intensely for investment, India cannot afford to send mixed signals. Sustained reforms in labour laws, logistics, taxation, and financial markets are essential to preserve the positives in the economy and minimise the ill effects of the increasingly visible negatives. The government must widen and deepen reforms for good macroeconomic numbers.