The Art of the Possible

EVERY TWO MONTHS, the Reserve Bank of India (RBI) conducts a Survey of Professional Forecasters (SPF) and asks them to give their estimates of a number of economic variables such as growth and inflation. In the latest round of the survey, conducted in July, it threw up interesting forecasts. Of the 49 economists who were surveyed, the median estimate for economic growth in the first quarter of 2025-26 (Q1, 2025-26) was 6.5 per cent. A month later, when the actual data arrived, it was found that the Indian economy had grown at a much faster rate of 7.8 per cent. The data was remarkable as the survey was conducted before US President Donald Trump imposed an additional penal tariff of 25 per cent on India for purchasing crude oil from Russia and its alleged involvement in funding Russia’s campaign in Ukraine. That single, unilateral and whimsical, action on the part of Trump threw all estimates of India’s economic growth out of kilter. Preliminary estimates suggested that India would not be scarred to an extent that its economic growth could get derailed. Early estimates suggested that India’s GDP growth could be shaved off anywhere from 0.3 to 0.5 percentage points. A little later, this number was revised to 0.7 percentage points. At that point, the first signs of panic began emerging in the public. From jewellery exporters in Surat to shrimp farmers in Andhra Pradesh, fears that multiple sectors of India’s vibrant export economy could be hit began to be aired openly. But before any of this could become infectious, the prime minister had made his statement from Red Fort about rationalising Goods and Services Tax (GST) rates. The results are for everyone to see. The large cuts in GST are now powering domestic consumption that has not been seen in recent times. It is a painful reality that consumption, once considered the strongest engine of India’s economic growth, remains weak. A number of factors led to this situation. But that is changing now. In the five months since February, RBI has also loosened monetary policy and liquidity is now surging through the Indian economic system. The first quarter growth results, in retrospect, should not surprise anyone. The additional boost likely from the GST rate re-jigging is likely to keep growth in the second and third quarter of the year on a speedy course. It will not be surprising if the Indian economy grows at a rate that will surprise everyone. In these volatile and uncertain times, economic growth matters above everything else. As countries arm themselves— when they are not indulging in trade wars—the importance of growth at 6.5 per cent-plus, if not 7 per cent, is not lost on India’s leaders and economic policymakers. But if understanding that imperative is necessary, delivering actual outcomes is a different, more complicated matter. India is a country with in-built inflationary pressures where it is easy to open the spigots powering growth but inflation, once unleashed, is usually very difficult to bottle back. But even with the customary caution of RBI, the results this year show that growth continues to power on even in the face of global uncertainties that clearly affect India in an adverse manner. In late September, in two posts on social media, Trump issued diktats for which he has become infamous. On September 29, Trump said he would be imposing a 100 per cent tariff on any and all movies made outside the US. He prefaced the announcement by saying, “Our movie making business has been stolen from the United States of America, by other Countries, just like stealing candy from a baby.” In a similar vein, he issued another statement on the same day and said, “I will be imposing substantial Tariffs on any Country that does not make its furniture in the United States.” The move, ostensibly, is to make the American state of North Carolina “great again”. Depending on how one views the American president, these social media posts can be considered examples of his extremely erratic behaviour, online and in the real world. From another vantage, Trump’s “economic policies” now represent the rapidly disintegrating framework of global trade. The trend of trade and trading preferences being dictated by political choices has been described by analysts as “Geo-economic Fragmentation” (GEF). In 2023, the International Monetary Fund (IMF) described GEF as “Policy-driven reversal of integration, often guided by strategic considerations.” What Trump is doing fits this description neatly. Since early April—the so-called “Liberation Day” when Trump outlined tariffs for virtually all his trading partners and even uninhabited islands—the global economic situation has gone for a toss. The July update of the World Economic Outlook (WEO) issued by IMF projected global economic growth at 3 per cent, up by 0.2 percentage points over the previous estimate. But this sanguine projection hides the true extent of Trump’s tantrums and the cost they have inflicted on the global economy. The actual outcomes will only be known with a lag of at least a year. By then, the world will be an unrecognisable place. THIS LEAVES INDIA in an unenviable place. At the moment, the potential success or failure of India’s trade negotiations with the US is hard to assess. Given the random accusations made by Trump and his associates against India, it is hard to say with any confidence if the 50 per cent tariff imposed on India will be reduced in any meaningful way. India’s exports to the US are expected to slow down considerably, if not come to a halt. In July, the latest month for which data is available, India’s exports to the US clocked $9 billion. US imports into India, on the other hand, continue as before. While talks continue with the US, India is exploring trade agreements with other countries and trading blocs. India’s trade agreement with the European Free Trade Association (EFTA) kicks in from October 1. EFTA is a free trade association and trade area comprising Norway, Iceland, Lichtenstein, and Switzerland. The agreement was signed in 2024 and includes a commitment to undertake an investment of $100 billion over time in India. The first tranche of the investment is expected to be announced very soon. Then there are other potential trade agreements with countries like Oman and Chile. India has a Preferential Trade Agreement (PTA) with Chile that dates back to 2006. But efforts are now being made to transform this into a Comprehensive Economic Partnership (CEPA). India has CEPA format agreements with the UAE and is also negotiating CEPAs with other countries. The CEPA format is comprehensive and includes investment and trade in services, among other subjects. India, clearly, is not moving away from trade and turning itself into an inward-looking economy. In 2024, it exported merchandise worth $442.6 billion and was ranked 18 among exporting economies according to the World Trade Organization (WTO). But 2025 is very different from 2024. With the rise of dramatic uncertainties in the trading world, India not only has to explore alternative markets for its exports but also has to, perforce, push domestic sources of growth. That explains the emphasis on tools such as monetary and fiscal policies. The rationalisation of GST rates is a fiscal response to maintain growth at a high rate. The same applies to monetary policy. From February 2025 onward, RBI reduced the repo rate—or the rate at which banks borrow from the central bank—by 100 basis points to 5.50 per cent where it stands currently. This amounted to a large injection of liquidity in the system. As a result, in its resolution in early August, the Monetary Policy Committee (MPC) of RBI took a pause in its policy rate-reducing drive. In its rationale for holding the repo rate at 5.50 per cent the MPC said, “On balance, therefore, the current macroeconomic conditions, outlook and uncertainties call for continuation of the policy repo rate of 5.5 per cent and wait for further transmission of the front-loaded rate cuts to the credit markets and the broader economy. Accordingly, the MPC unanimously voted to keep the repo rate unchanged. The MPC further resolved to maintain a close vigil on the incoming data and the evolving domestic growth-inflation dynamics to chart out the appropriate monetary policy path. Accordingly, all members decided to continue with the neutral stance.” In the minutes for this meeting released on August 20, the MPC felt that while inflation at that time was under control and “benign”, it was expected to inch upward beyond the 4 per cent target of the central bank by Q4 2025-26. Interestingly, in the SPF that was conducted in July (and released soon after the MPC met in August), the median forecast for inflation in Q4 2025-26 was also 4.3 per cent. Clearly, RBI was being cautious, as any independent central bank would be. In contrast, just 10 days after the RBI MPC met and announced its decisions, the prime minister spoke from the ramparts of the Red Fort and highlighted the coming rejig of the GST rates. He took a bold bet on growth based on consumption and was not troubled by the possibility of inflation. As of now, the bet on growth is paying off. India is among the exceptional economies of its size growing at a 6 per cent-plus rate. It is not surprising that the US, a ‘friend’ of India, increasingly considers the latter an “economic rival”, a proposition that no one, even New Delhi, would take seriously. But these are not only uncertain times; these are also times when the biggest economy in the world, which happens to be a military giant, is displaying an unusual lack of confidence. India, on the other hand, remains cautious even as it marches forward.

The Art of the Possible

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