THE pandemic and the Ukraine war created upheavals in the global economy with supply chain disruptions and inflationary pressures leading to pain for both advanced and emerging economies. India, however, was able to bounce back from both these international crises faster than most economies. In fact, it was on a path to recovery in 2022 when the Ukraine war broke out. The conflict created severe dislocations in terms of energy prices as well as the availability of critical goods, like fertilisers and edible oils, usually sourced from Russia and Ukraine.
India was able to diversify on the oil front by making a pivot to Russia while locating other Asian suppliers of edible oils. The fertiliser shortage was fortunately short-lived. Domestic policies were also fine-tuned to bring about a steep rise in capital expenditure to give a thrust to massive infrastructure development. Other measures, like the production-linked incentive (PLI) scheme for a wide swathe of industries, including electronics, also revived the industrial sector.
By 2023-24, the GDP growth rate had reached as high as 8.2%, but it decelerated to 6.5% in 2024-25. This kept India at the position of the world’s fastest-growing economy, but the sudden imposition of 50% tariffs by the US in August last year looked set to derail the growth momentum, especially in the light of stagnating overseas demand.
The skyrocketing tariffs imposed on the country’s biggest export destination should have led to a drastic fall in bilateral trade flows. On the contrary, exports to the US continued to rise, led by smartphones, largely of the Apple variety. Other critical export sectors like gems and jewellery survived by diverting supplies to the burgeoning West Asia market. The growing importance of the region can be seen in the fact that the UAE is now the third largest trading partner, after the US and China.
The latest economic indicators must be viewed in this context as it seems that yet again the economy has been able to deflect the impact of external headwinds. Despite the West Asia war, consumption is robust with Goods and Services Tax (GST) collections for April, the first month of the current fiscal, having reached record levels. These rose by nearly 9% to Rs 2.43 lakh crore compared to Rs 2.37 lakh crore in the same month last year. The growth has been powered largely by import transactions which have risen by 26% compared to 4.3% for domestic ones.
Demand for passenger cars is also buoyant, with a rise of 27% in sales during the month. This assumes significance as the automotive sector has a cascading effect on other linked industrial and service sectors. It contributes 7% to overall GDP, about 15% to manufacturing GDP and employs as many as 30 million workers directly and indirectly through related service sectors. It must be recalled that the recent industrial unrest in the national capital region was largely of workers in the automobile industry.
Digital transactions are also reported to be on the upswing, rising by 25% during April compared to last year. The other positive indicator is the rise in power consumption by 4%. Simultaneously, reports are coming in of higher demand for consumer goods while demand for smaller packs appears to be declining.
Thus, the West Asian conflict has yet to have major ramifications on the economy. There are multiple reasons for the muted effect of the conflict in the short run. The first is that prices of critical petroleum products like petrol, diesel and LPG have been contained at pre-war levels. Keeping the lid on retail prices may prove difficult for oil refining and marketing companies as under-recoveries on products have risen steeply owing to international crude prices rising over $100 per barrel. A price hike is inevitable, though it may be kept in abeyance for a while. In the short term, however, the containment of prices has ensured that inflationary pressures are not allowed to spiral out of control.
The second is the fallout of last year’s GST rate cuts. The rate cuts were implemented in September last year but the impact is apparently being felt even now in terms of an across-the-board demand for products. And finally, tailwinds from the series of interest-rate cuts last year continue to be felt on domestic demand.
Going forward, however, there is bound to be greater financial stress as a result of higher energy prices. Whether this will affect the current account deficit will depend largely on the extent to which remittances remain on track as well as merchandise and services exports. As far as the latter are concerned, it must be underlined that the depreciating rupee has enhanced profitability of the IT sector, which brings in the bulk of revenues from services exports. Gross foreign direct investment (FDI) is also expected to reach a record level of $90 billion in 2025-26. Net FDI, however, is far lower and that is a matter of concern. The decision to make Chinese investments easier by altering press note 3 related to neighbouring countries as well as the notification permitting 100% FDI in insurance could help improve this situation in the medium and long term.
Any jubilation over the April data may be premature, given that the West Asia war is not yet over. At the same time, it gives a glimmer of hope that the war may not have as adverse an effect on economic growth in the medium term as was anticipated at the outset. Much will depend on the duration of the conflict and the speed with which the sensitive Strait of Hormuz can be opened up. Much will also depend on whether more policies can be crafted to insulate the economy from the consequences of the war.
