Domestic challenges are a bigger threat to economy than global headwinds

While still relatively strong, India’s economic outlook is facing significant headwinds from international trade developments and internal policy challenges. Finance Secretary Ajay Seth told in Washington that US tariffs could shave 0.2-0.5 percentage points off India’s GDP growth. He said that while India remains committed to achieving long-term growth of seven per cent or more, the global trade environment—particularly measures introduced by US President Donald Trump—could create indirect disruptions that could hinder economic momentum. These tariffs, though not specifically aimed at India, are contributing to a broader slowdown in global trade, which in turn may affect Indian exports. The World Trade Organization (WTO) has already forecast a sharp deceleration in global trade, with rising protectionism and the US-China tensions exacerbating the situation. Unsurprisingly, the World Bank has revised its growth forecast for India downward. In its latest projection, it lowered India’s expected growth for the current fiscal year to 6.3 per cent, a full 0.4 percentage points lower than its previous estimate of 6.7 per cent for 2025-26.

The revision is largely attributed to global economic weakness and increased policy uncertainty. Likewise, even IMF, in its World Economic Outlook, has downgraded India’s growth forecast for FY26 by 30 basis points to 6.2 per cent, citing similar concerns. A key area of domestic concern is the sluggish pace of private investment. Krishna Srinivasan, Director of IMF’s Asia and Pacific Department, pointed out that private sector investment remains weak, especially in capital-intensive sectors such as manufacturing and machinery. “Private investment is still lackadaisical,” Srinivasan said, while emphasising that if India was serious about achieving its goal of becoming a developed economy by 2047, then accelerating private investment is non-negotiable. While some of the concerns about the Indian economy are genuine, the negative effects of others are overstated; the damage caused by US tariffs is such. The PHD Chamber of Commerce & Industry (PHDCCI) has estimated that the actual impact of the tariffs on Indian GDP would only be around 0.1 per cent. The chamber attributed this resilience to cost competitiveness and supportive government policies.

Meanwhile, we must consider fact that India is subject to lower tariffs by the US compared to regional competitors like Vietnam, Cambodia, and Bangladesh, potentially giving our exporters an advantage in the US market. This could open up new trade opportunities in course of time. The more pressing challenge to India’s economy is regulatory unpredictability, particularly regarding taxation. Several major multinational technology firms—including Microsoft, Amazon, Google, Oracle, IBM, and Salesforce—have recently received tax assessment notices from Indian authorities. The income-tax department has categorised their revenue from Indian customers as “fees for technical services” (FTS), which is subject to a 15 per cent tax under the India-US Double Tax Avoidance Agreement. This classification persists despite a 2021 Supreme Court ruling that such income does not qualify as FTS under existing legal frameworks. Such moves from the tax authorities vitiate the business climate and contribute to an environment of uncertainty that foreign investors find difficult to navigate. If India is to position itself as a reliable destination for global capital and innovation, it must uphold the rule of law and adhere to judicial precedents.