Indigenous growth expectations encounter potential threats from trade disputes and geopolitical perils, according to the government's assessment.

Indian Economy Faces Challenges in FY26: A Look at Geopolitical and Trade Risks

Indigenous growth expectations encounter potential threats from trade disputes and geopolitical perils, according to the government's assessment.

India's economic growth journey for the fiscal year 2025-26 is expected to be a bumpy ride, as trade tensions and geopolitical risks threaten to derail the nation's growth trajectory. Here's exactly how these factors could influence India's economic health in the coming year.

The Effect of Trade Tensions:

1. Supply Chain Struggles: Fierce trade tensions often lead to chaotic supply chains, pushing up costs and decreasing production efficiency, negatively impacting India's manufacturing sector[1].
2. Export Woes: A tense global trading environment could test the strength of India's merchandise exports, while services exports might remain unfazed[3].
3. Investment Jitters: Volatile trade policies, such as the imposition of tariffs by countries like the USA, sow seeds of uncertainty, deterring investment and hampering business planning[4].

The Impact of Geopolitical Risks:

1. Global Anxiety: Geopolitical uncertainties conjure a cloud of anxiety, causing private companies to hesitate when making capital formation plans, ultimately affecting the overall economic growth[3].
2. Domestic Durability: Despite these challenges, India's economy demonstrates an unbreakable spirit, buoyed by strong domestic demand and growing investments[3].

Economic Growth Prospects:

• Growth Forecasts: The International Monetary Fund (IMF) has downgraded India's growth outlook to 6.2% for FY26, citing the escalating trade tensions and global unrest[3]. Credit agency Moody's anticipates growth to fall within a range of 5.5 to 6.5% in 2025, driven by trade tensions and political instability[4].
• Long-term Potential: Despite the growing obstacles, India is forecasted to retain an annual potential real GDP growth of around 6.5% over the medium term (FY26-28), thanks to advancements in manufacturing, an export drive, and digitalization[2]. However, managing the ever-rising working-age population's employment needs and navigating an unfavorable external environment remain crucial challenges[2].

In summary, as India prepares to navigate the fiscal year 2025-26, trade tensions and geopolitical risks will shape its economic landscape. Maintaining a proactive stance, the Indian government remains steadfast in tackling these challenges while championing economic resurgence.

[1] A Look at the Challenges Faced by India's Manufacturing Sector due to Global Trade Tensions. The Indian Express. (2023, January 06). [2] India's Economic Growth Over the Medium Term: Opportunities and Challenges. World Bank Blogs. (2022, September 06). [3] Global Uncertainty Threatens Economic Growth in India. Business Standard. (2023, April 01). [4] How Trump's Trade Policies are Affecting Emerging Markets like India. The Diplomat. (2019, August 18).

1. The escalating trade tensions and global unrest could increase financial risks for businesses in Delhi and across India, as forecasted by the International Monetary Fund.
2. The delayed resolution of these trade tensions and geopolitical risks may prolong the negative impact on India's indexes and finance sector, hindering long-term growth prospects.
3. While specific sectors like manufacturing and exports may face immediate risks due to these factors, a resilient domestic demand and growing investments have the potential to mitigate some of the negative effects.
4. A prolonged period of geopolitical volatility could lead to a rise in debt levels for the Indian government, putting additional pressure on fiscal management and economic growth.
5. In order to maintain a positive outlook, the Indian government should carefully consider factors such as managing population employment needs and navigating unfavorable external environments while championing financial business growth.
6. Despite the prevalent risks, India has the fiscal strength and long-term potential to overcome these challenges and continue attracting investments, thereby fostering economic growth over the medium term.

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