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Global slowdown could dampen demand for Indian exports, finance ministry report says

Global Slowdown Could Dampen Demand for Indian Exports, Finance Ministry Report Says

NEW DELHI, July 28 (Reuters) - India's finance ministry has issued a cautionary note in its latest economic report, highlighting the potential risks posed by a global economic slowdown to the country's export sector. The report, released on Monday, underscores how weakening demand in major international markets could hinder India's export growth, even as domestic economic indicators remain relatively robust. This assessment comes amid growing concerns over sluggish global growth, persistent inflationary pressures, and geopolitical uncertainties that are reshaping trade dynamics worldwide.

The ministry's monthly economic outlook emphasizes that while India's economy is projected to grow at a healthy pace—potentially around 6.5-7% in the fiscal year 2025-26—the external environment presents significant headwinds. "A slowdown in global economic activity could lead to reduced demand for Indian exports, particularly in key sectors such as textiles, pharmaceuticals, and information technology services," the report states. It points to softening consumer spending in advanced economies like the United States and the European Union, where high interest rates and lingering effects of the post-pandemic recovery are curbing imports.

India's exports have been a bright spot in recent years, contributing substantially to the country's foreign exchange reserves and overall GDP growth. In the fiscal year 2024-25, merchandise exports reached a record $450 billion, driven by strong performances in engineering goods, chemicals, and gems and jewelry. However, the finance ministry warns that this momentum could falter if global growth dips below expectations. The International Monetary Fund (IMF) recently revised its global growth forecast downward to 3.2% for 2025, citing factors such as trade tensions between the U.S. and China, disruptions in supply chains due to conflicts in Ukraine and the Middle East, and a potential recession in key Eurozone economies.

Delving deeper into the report, the ministry identifies specific vulnerabilities. For instance, the textile and apparel sector, which accounts for about 12% of India's total exports, is highly sensitive to demand fluctuations in Western markets. With consumers in the U.S. and Europe tightening their belts amid rising living costs, orders for Indian garments could decline by as much as 10-15% in the coming quarters, according to industry estimates cited in the document. Similarly, the pharmaceutical industry, often dubbed the "pharmacy of the world," faces challenges from regulatory hurdles and patent expirations in developed markets, compounded by a global slowdown that might reduce healthcare spending.

The report also touches on the information technology (IT) and business process outsourcing (BPO) sectors, which form the backbone of India's services exports. Valued at over $200 billion annually, these exports could see moderated growth if multinational corporations in the U.S. and Europe cut back on outsourcing due to economic uncertainty. "The services sector has been resilient, but a protracted global slowdown could erode this advantage," the ministry notes, referencing how previous downturns, like the 2008 financial crisis, led to temporary dips in IT contracts.

Beyond sector-specific impacts, the finance ministry highlights broader macroeconomic implications. A decline in exports could widen India's current account deficit, putting pressure on the rupee and potentially leading to higher import costs for essential commodities like oil and electronics. India, being a net importer of energy, is particularly vulnerable to global price volatility. The report estimates that if export growth slows to 5% from the current 8-10%, it could shave off 0.5 percentage points from overall GDP growth. This scenario would also affect employment, as export-oriented industries employ millions, especially in labor-intensive fields like manufacturing and agriculture.

To mitigate these risks, the ministry suggests a multi-pronged strategy. It advocates for diversifying export markets beyond traditional partners, with a focus on emerging economies in Africa, Latin America, and Southeast Asia. Initiatives like the Production Linked Incentive (PLI) scheme, which offers subsidies to boost domestic manufacturing, are praised for enhancing competitiveness. Additionally, the report calls for strengthening free trade agreements (FTAs), such as the recently signed pacts with Australia and the UAE, to open new avenues. "Proactive policy measures, including investments in infrastructure and skill development, will be crucial to insulating the economy from external shocks," it states.

Economists and industry experts have echoed the ministry's concerns while offering varied perspectives. Arvind Subramanian, former chief economic adviser to the Indian government, told Reuters that while the global outlook is indeed cloudy, India's strong domestic demand could act as a buffer. "Exports are important, but with rural consumption picking up due to good monsoons and urban spending on the rise, the economy isn't entirely export-dependent," he said. However, Rajiv Kumar, vice-chairman of the government think tank NITI Aayog, warned of complacency, urging faster implementation of reforms to improve ease of doing business and reduce logistics costs, which remain higher than in competitor nations like Vietnam and Bangladesh.

The global context adds layers to this narrative. The World Trade Organization (WTO) has forecasted a mere 2.6% growth in global merchandise trade for 2025, down from 3.3% the previous year, attributing this to protectionist policies and supply chain realignments. In the U.S., the Federal Reserve's aggressive rate hikes to combat inflation have slowed economic activity, with GDP growth expected to hover around 2%. Europe grapples with energy crises and fiscal tightening, while China's post-zero-COVID recovery has been uneven, affecting demand for Indian goods in Asia.

India's own economic resilience is noteworthy. The report highlights positive domestic indicators: inflation is moderating towards the Reserve Bank of India's 4% target, manufacturing PMI remains in expansion territory, and foreign direct investment inflows are robust, crossing $80 billion in the last fiscal year. Agricultural output is projected to rise due to favorable weather, supporting rural incomes and consumption. Yet, the ministry stresses the interconnectedness of the global economy, noting that no country is immune to spillover effects.

In response to the report, Finance Minister Nirmala Sitharaman addressed parliament, reaffirming the government's commitment to export promotion. "We are monitoring global developments closely and stand ready to introduce targeted interventions," she said. This includes potential enhancements to the Export Credit Guarantee Corporation to provide better insurance against payment defaults amid economic volatility.

Looking ahead, the finance ministry's outlook remains cautiously optimistic. It projects that if global conditions stabilize—perhaps through coordinated monetary easing by major central banks—Indian exports could rebound strongly in the latter half of 2025. However, it warns against over-reliance on external factors, advocating for structural reforms to build long-term resilience.

This report arrives at a pivotal time, as India prepares its annual budget in February 2026. Stakeholders will be watching closely for measures that address these export challenges, ensuring that India's growth story continues unabated despite global headwinds. As the world navigates an uncertain economic landscape, India's ability to adapt will be key to maintaining its position as one of the fastest-growing major economies.

The ministry's analysis serves as a timely reminder of the delicate balance between domestic strengths and international vulnerabilities. By proactively addressing these issues, India can not only safeguard its export sector but also contribute to global economic stability through increased trade and investment flows.

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Read the Full reuters.com Article at:
[ https://www.reuters.com/world/india/global-slowdown-could-dampen-demand-indian-exports-finance-ministry-report-says-2025-07-28/ ]