Context:
The imposition of additional tariffs by the United States (US) on Indian exports, even at modest rates, could lead to a decline in India’s export growth. This, combined with a potential moderation in global demand, presents a challenge for India’s export-driven sectors. A positive offset to this impact could be lower crude oil prices, which may help reduce India’s import bill and thus mitigate the negative effects on the trade balance.
Fiscal Impact and Budget Forecasts
- Nominal GDP Growth: The government has forecast a nominal GDP growth rate of 10.1% in the Union Budget. With real growth at over 6% and inflation around 4%, government receipts are likely to align with these projections.
- Expenditure and Social Security: Given the expectation of a good monsoon and the modest impact of external uncertainties on the real economy, there seems to be no immediate need for additional social security measures. The government can therefore focus on economic policy to boost long-term growth.
Strategies to Leverage the Current Crisis
India can turn the current uncertainty into an opportunity by adopting a two-pronged strategy:
- Restructuring Trade Partnerships
- India is in discussions with key trade partners such as the US, UK, and EU. Given the ongoing global trade uncertainties, India should diversify its trade portfolio to build stronger partnerships and reduce dependence on any one region.
- India could also consider engaging with China more actively, despite the ongoing tariff tensions, to broaden its trade networks.
- Strategic Industrial Policy
- Industrial Policy Focus: Developing a strategic industrial policy could help India optimize its position in global supply chains, especially as the global trade environment changes. This would focus on critical sectors that align with global demand shifts and emerging technological trends.
Policy Measures to Support Investment
To support investment in new sectors, the following measures could be considered:
- Government Equity Support:
- The government could provide minority equity support in strategic sectors, similar to how Finland supported Nokia and the US helped Apple with loans. This approach would allow the government to capitalize on successful ventures and use the returns to support other emerging sectors.
- Skill Development Initiatives:
- Skill India programs should be enhanced by building industry partnerships to identify emerging skills and market needs. The government could adopt a forward-looking approach, similar to Sweden’s model, to support the development of new skills and reskilling programs for the future workforce.
- Affordable Housing for Workers:
- With housing being a significant cost for workers, the government could focus on providing affordable housing near manufacturing hubs. Programs like the Pradhan Mantri Awas Yojana could be expanded to create low-rent housing for workers in high-demand industrial areas.
While the global tariff scenario poses challenges for India, it also presents an opportunity to restructure trade partnerships, develop a strategic industrial policy, and implement key support measures to attract investment. India’s growth forecast remains positive, and with the right policies, the country can turn these challenges into long-term economic advantages.
