Open Forum

New Delhi, 6 August 2025

India’s Eco Future

NAGGING UNCERTAINTY

By Dhurjati Mukherjee 

The recent India-UK trade agreement is expected to boost India's exports, particularly in textiles and pharmaceuticals. However, a challenge has emerged as President Trump announces imposing a 25 per cent tariff on Indian goods, with an unspecified penalty clause, effective October 7. Though the deal is yet to be discussed and finalised, the American move could put India at a disadvantage compared to other low-cost exporters like Vietnam, Indonesia, and the Philippines. 

Several sectors are currently exempt from the reciprocal tariffs, including oil and petroleum products, active pharmaceutical ingredients, smartphones, and electronic goods. The recently published ‘State of Economy’ report by the Reserve Bank of India (RBI) raises concerns about potential challenges facing India’s economic outlook. Some economists note that in the absence of a final deal within two to three months, there could be a measurable impact on full-year GDP growth estimates for India. Conversely, some analysts believe that, given the economy’s reliance on domestic demand, overall growth may remain relatively stable. 

According to the RBI report, the future trajectory of the economy faces uncertainty due to both global and domestic factors. If the report had been released after the announcement of the US tariffs, the tone might have reflected additional negative pressures. The report highlights positive prospects for the kharif crop owing to widespread rainfall, while industrial growth is described as modest. It also notes that industrial activity has weakened, with production dropping to a nine-month low in May and demand indicators remaining subdued. 

Progress on the ‘Make in India’ initiative remains limited, primarily because private sector expansion has not occurred at scale. However, defence manufacturing within public sector organisations continues to show resilience. The government has provided support to industry, but challenges persist in integrating suitable technology and achieving cost-efficient production. 

The report indicated that bank credit growth has slowed across major sectors, as has lending by non-banking financial companies. Public finances have also experienced pressure, particularly due to increasing state deficits and a significant decrease in Union government grants. State finances are described as vulnerable, citing factors such as governance challenges, expenditure management, and limitations in resource generation. 

The report also discussed issues related to the education and health sectors, highlighting concerns about underinvestment and corruption. It noted that many government institutions in several states face challenges in delivering quality education and healthcare. Additionally, government spending in these sectors is among the lowest compared to other BRICS nations, with states in the north and east receiving comparatively less focus in these areas. 

The rural situation is deteriorating, as highlighted in the central bank’s report noting high demand for job schemes due to rural distress—a fact the government refuses to heed or even denies. Economist Amit Mitra presently Principal Chief Adviser to Bengal Chief Minister Mamata Banerjee, cites a disparity between official unemployment figures (4.9% for 2023-24) and Centre for Monitoring Indian Economy’s estimate (8%), with unemployment numbers frequently exceeding 40 million, mostly among youth. He posted on X “the absolute figure of unemployment has repeatedly pierced the 40 million mark, close to the population of Spain”. Underemployment, particularly prevalent in rural areas, further worsens the problem. 

Though the country’s growth is quite high, as measured by GDP, this is contributed mainly by the business leaders and per capita income has not increased significantly, except for the rich and the upper middle-income sections. Meanwhile, food inflation over long periods has affected a great number of people, particularly in rural India. The condition of people in the backward districts has, in fact, deteriorated over the years, in spite of policies initiated by the Centre and the states.     

Economists believe that jubilation about growth is misplaced with the tariffs imposed by the US. The challenge lies in sustaining the present situation to prevent export disruptions from derailing growth and a fiscal stimulus programme may be considered to shore up weakening business sentiment. It has to be admitted that we cannot get on a sustainable growth trajectory without embarking on structural reforms and in this regard, the government’s record is rather discouraging. Many of the reforms like GST, the bankruptcy code and monetary policy framework were already there, and it just carried this forward.   

Another aspect ignored by the present dispensation is revitalisation of the rural economy and developing backward districts. In fact, the rural sector has not been given sufficient attention as a result of which villages could not be made agents of change and part of the development process, resulting in crores of people not increasing their income and getting the necessities of life. 

One may mention here that the World Bank recently estimated that the claim of reduced income inequality in India does not represent any improvement in the equalization of earnings nor does it indicate an upgradation in economic capacity. Meanwhile, income inequality in the country rose between 2004 and 2023 while wage inequality remains high – in 2023-24 the top 10 per cent median earnings exceeded those of the bottom 10 per cent by 13 times. The critical situation existing amongst most workers in the unorganized sector continues with even the declared minimum wage not being implemented. 

False assurances and widespread corruption have worsened the county's socio-economic conditions. Without effective solutions, economic recovery remains unlikely, especially now. While resources are crucial for reforms and infrastructure development, measures like wealth and inheritance taxes—common in many countries—could be considered. 

Finally, the role of the private sector has a crucial role to play in this critical scenario. Instead of making easy money and profits from hospitals and educational institutions, they should put sharp focus on manufacturing and developing cost-effective quality products with appropriate technology. This, additionally to meet global standards and help in diversifying to new markets as there is every possibility of there being a fall in exports to the US. All eyes are now on how the Centre deals with the American demand. ---INFA 

(Copyright, India News & Feature Alliance)