The Finance Ministry cannot be faulted for its unbounded optimism when it contends in the latest Monthly Economic Review that the outlook for the Indian economy appears ‘positive’, despite many imponderables including the great uncertainty to the global economy in the wake of tariff tantrums willfully thrown up by US President Donald Trump. This is akin to the taper tantrum of 2013 for the spike in US Treasury yields triggered by the Federal Reserve’s bid to reduce its bond purchases and the attendant turmoil it caused in the global financial markets.
Though both the tantrums did not scald the world economy in general and the emerging economy like India in particular because of the subsequent US actions, what would happen once the reprieve to high tariff is over in July and how the Indian trade negotiators succeed in appeasing the mercurial US President in the give and take bilateral trade agreement would largely determine the way forward?
As wonted, the mandarins in the Finance Ministry paid peans of praise to the ‘resilience’ demonstrated by the domestic economy in the face of “a turbulent global environment with the growth momentum supported by easing inflationary pressure, growing consumption demand, fiscal discipline, labour market stability and a resilient financial sector”. Even then, it said, uncertainties stemming from global developments constitute ‘a key risk’ for the growth outlook for the fiscal 2025-26!
Cryptically but elliptically, it said the growing perception of prolonged uncertainty, more than dim trade portent, might lead the private sector to put its capital formation plans on hold. However, it urged the private sector and policymakers to be mindful of this risk and urgently to avoid making uncertainty feed upon itself. It is interesting that the counsel is given both, to the private sector and functionaries in key ministries that are mandated to facilitate doing business easy in the domestic economy for entrepreneurs to be hassle-free.
It is another tale the signals coming from the mandarins of the Finance Ministry are read for wrong than right reasons by other stakeholders including public sector banks that fight shy of lending to business, trade and industry lest they should get penalised later on if the advances become albatrosses for no fault of their own but due to a congeries of circumstances that wantonly trace the defaults to mispricing of risks by them! It is, therefore, quite unsurprising that as of March 21, 2025, non-food bank credit (read for commercial and essential segments including industry and trade) increased at “a slower rate of 12% year-on-year, compared to 16.3% earlier.’’
This meant that the tendency to stay comfortable by resorting to lazy banking by parking funds in government securities than in the core task of lending to private sector is intractable to give up. Policy wonks wonder whether the nudge from the Finance Ministry Review should wake even a few of them up to do their mite to rev up growth impulses!
This needs to be set against in the Review itself which gloated the country’s financial sector is showing resilience amid global gloom. To boot, as of September 2024, the banking sector’s gross non-performing assets (GNPAs) ratio has improved to 2.6%, reflecting robust fundamentals in general and leeway for expansion in banking assets in particular. Stress tests confirm that banks can maintain capital adequacy ratios above regulatory minimum, even in severe scenarios. It further noted that while debt market yields have softened, the country’s bourses have recovered moderately in March due to increased equity inflows. Additionally, the Indian rupee has demonstrated relative strength and stability, despite global volatility in the last quarter of 2024-25.
Leaving aside the manufacturing segment that continues to be the Achilles’ heel of the economy with domestic units hobbled by high-cost structure deeply embedded over the years by inverted duty anomaly, where intermediate imports turning expensive than finished products, there has not been any marked headway in factor markets reforms including labour and land. Institutional credit flow at affordable cost and in abundant measures remains a pipedream for manufacturers in general and medium, small and micro enterprises (MSMEs) in particular.
The Review also pertinently highlights the need for removal of a raft of compliance that remains redundant but painstaking to the industry, inspection and logistics hurdles that have assumed ‘far greater urgency than before’. The bureaucracy remains obdurate in obliterating the obstacles lest it should take away its perverse pleasure for extracting rent. The political will needs to be demonstrated without rue and regret to end this policy fallacy to move towards the larger goal of Viksit Bharat.
Services sector with a lion’s share in the gross domestic product (GDP) growth, though performing better post pandemic, is likely to suffer collateral damage in the crossfire of goods trade that faces insurmountable tariff walls.
It is the agriculture sector that offers a ray of hope this fiscal, bolstered by a hopeful south-west monsoon, wholesome reservoir levels and robust crop production. How timely policy support and proper marketing strategy with credit on easier terms to peasants are evolved and extended to consolidate the likely gains would determine the good harvest of results as the months go by.
(G Srinivasan is a senior economic journalist based in New Delhi.)
