THE HINDU EDITORIAL

By
Anushka_Academy
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2
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​Diversify now: On India and looming economic risks

India needs to expand its trading base to overcome global headwinds

February’s sharp rise in the monthly services Purchasing Managers’ Index (PMI), to 59, has provided a welcome relief to investors and policymakers, following the rise in GDP growth numbers, released by the National Statistical Office (NSO) for the December quarter of the current fiscal (Q3FY25). The strong rebound in the services PMI, up from 56.5 in January, which marked a 25-month low, helped offset the decline in the manufacturing PMI, which fell to a 14-month low of 56.3 in February. A PMI reading above 50 signals expansion, while anything below this indicates contraction. The PMI survey, conducted every month by S&P Global across over 40 countries, is a key indicator of economic momentum. The fact that manufacturing and services — sectors that have accounted for about 80% of India’s GDP since 2010 — remain in expansion mode is positive. This resilience persists despite capital outflows from Indian markets, suggesting that the country’s economic fundamentals remain strong. A more telling indicator of long-term economic strength is the quarterly earnings of the Sensex, India’s benchmark index comprising 30 of the most valued and actively traded companies on the Bombay Stock Exchange (BSE). The Q3FY25 results point to solid net profit growth for nearly all firms.

However, looming economic risks remain. The threat of reciprocal tariffs announced by United States President Donald Trump, and set to take effect on April 2, poses a challenge for the manufacturing sector. Meanwhile, the services sector is facing a different disruption: the rapid pivot to artificial intelligence (AI)-driven solutions. While the NSO reported 6.2% real GDP growth for Q3FY25, top executives from India’s leading IT firms have, at an industry event in Mumbai, cautioned that growth in the sector could be as low as 5.1% in FY25, up from 3.8% in FY24. Although this may seem concerning for an industry that has enjoyed a 16% compounded annual growth rate for nearly 25 years, it still represents an increase of $29 billion, bringing the sector’s expected value to $283 billion in FY25. In its 2025 Strategic Review report, NASSCOM has identified geopolitical upheavals and rising tariffs as key challenges. But business leaders at the event attributed much of the slowdown to the disruptive impact of AI, which is reducing earnings from new contracts and reshaping hiring and training practices. India’s services and manufacturing sectors face a triple challenge: rapid technological transformation, increasing global protectionism, and the potential for a U.S. recession. This could have significant repercussions for India, given that the U.S. remains its largest trading partner. To navigate these headwinds, India must urgently diversify its trading base.