Resilient Yet Vulnerable: India’s Economy, Markets, and Global Positioning (INDIA ROUNDUP, March 2025)

Economic Outlook

In a geoeconomically uncertain world, India has managed to maintain its position as one of the fastest-growing major economies. The Indian government’s latest data pegs the GDP growth estimates for FY 2024-25 at 6.5%, lowest in four years. It is important to note that in the recent past (2018-2024) the real growth has mostly fallen short of the government projections. The manufacturing Purchasing Managers’ Index (PMI) registered at 56.3 in February, indicating continued expansion, though slightly lower than January’s 57.7. The impressive PMI numbers hide the skewed bimodality – a few large corporations thriving while thousands of MSMEs are struggling – a long running concern.

The agricultural outlook appears positive with favorable monsoon forecasts for the upcoming season, critical for rural demand and food inflation control.

Consumer Price Index (CPI) inflation stood at 5.09% in February, remaining within the RBI’s target band of 2-6%, thus reported as benign. Yet this statistical compression hides the extreme variance across consumption baskets with sticky food inflation affecting the aggregate demand.

India’s fast-moving consumer goods (FMCG) market is expecting a gradual recovery in 2025, after a severe ‘demand-led’ slowdown a year earlier.

India’s geopolitical positioning – trying to balance relations between competing global powers – creates exposure to tail risks from multiple directions. The US tariffs on Steel and Aluminum and the threat of reciprocal tariffs are bound to severely hurt the industrial base of the economy.

Financial Markets

On the last day of February, Indian equities saw the worst sell off in 29 years, wiping $1.3 trillion in market capitalization. The extreme volatility represents persistent institutional outflows amounting to $25 billion in the prior six months, primarily caused by weak corporate earnings (60% of companies in Nifty 50 Index lowered their forward earnings guidance), and the lingering uncertainty of US tariffs.

The stock rout also points to the momentum seeking investors’ renewed focus on value in the post-DeepSeek China, a deeply discounted market with the current average PE ratio of 10.06.

Policy and Regulatory Changes

Capital expenditure execution accelerated in February, with the government re-focusing on infrastructure projects under the PM Gati Shakti program. The government also announced the expansion of Production Linked Incentive (PLI) schemes to drastically increase support for electronics, auto, specialty steel and textile sectors, with an expected outlay of $23 billion during 2025. The scheme so far has limited success in attracting big ticket manufacturing, with a consistent annual shortfall in the allocation against the budgeted outlay.

In a significant announcement, the Indian government has proposed to remove the Foreign Direct Investment (FDI) limits for insurance sector, thus opening it for 100% foreign ownership.

Political Landscape

The ruling coalition is tightening its grip, while opposition forces appear to lose momentum ahead of the elections in the states of Maharashtra and Haryana. This equilibrium masks social unrest exacerbated by growing income inequality. The government has been trying to assuage the concerns about unemployment and inflation by food and money transfer to 800 million people.

On international front, trade negotiations with the European Union gained momentum by the hurried India visit of EU president Ursula Von Der Leyen, with preliminary discussions focusing on a potential Comprehensive Economic Partnership Agreement. Officials indicated progress on market access issues and regulatory alignment.

In another development, China has offered an olive branch to India. The foreign minister Wang Yi at a press conference urged India and China to cooperate as partners. This attempted reset seems to be in line with China’s recent rapprochement with some neighboring countries, in what we believe, is driven by a desire to build stable coalition against swirling geoeconomic uncertainties.

Sectoral dichotomy

Data shows extreme divergence in manufacturing – certain sectors like automotive and electronics show vitality while others stagnate.

The services sector, particularly IT, healthcare and financial services, appear robust. But this apparent strength conceals dependency on external factors beyond India’s control. A significant portion of IT growth remains tethered to discretionary spending by foreign corporations – a major risk factor.

The government, in the recently unveiled budget, has renewed focus on big infrastructure spending. With improved execution capabilities, this push is expected to support growth in the construction sector, benefiting engineering, cement, steel, and other related industries.

India’s aggressive push towards renewable energy, with a commitment of 500 GW of non-fossil fuel capacity by 2030, offers big opportunities in sub-sectors such as energy storage.

Challenges

The complex regulatory environment continues to require careful navigation, with frequent changes in compliance requirements – the main reason why PIL scheme has failed to live up to the expectations. The skilled labor shortage in specialized sectors such as advanced manufacturing, data science, and renewable energy may constrain expansion plans. Wage inflation for skilled workers continues to outpace general inflation, affecting operating costs. Infrastructure bottlenecks, though improving, still pose challenges for supply chain efficiency.

A landscape of hidden risks and overlooked opportunities, India in 2025 is neither as robust as the optimists claim nor as fragile as the pessimists fear.

Disclaimer： This report is based on information/data available as of March 10, 2025, and represents an analysis of geoeconomic trends. It is intended for informational purposes only and should not be construed as business advice. The views expressed in this India Roundup do not necessarily reflect those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.

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