A successful US-India trade agreement could flip current "headwinds into tailwinds": FinMin report

Multiple agencies have projected India’s growth to be a range of 6.3 – 6.7 per cent in FY26

A successful US-India trade agreement could flip current headwinds into tailwinds, opening up new market access and energising exports, the finance ministry said in its Monthly Economic Review report for April. The ministry added that despite global uncertainties and trade tensions, India remains the fastest-growing major economy.

However, "external risks" persist, notably from a 26 percent US tariff on Indian imports, even as a temporary suspension is in place as bilateral negotiations continue, the ministry stated. "A successful trade deal could mitigate these risks and boost exports, even as private investment remains cautious in the face of global uncertainty," it said.

Multiple agencies have projected India’s growth to be a range of 6.3 – 6.7 per cent in FY26, supported by robust domestic fundamentals, stable macroeconomic management, and growing government capital expenditure, while declining inflation strengthens this outlook, it added. India’s consumer price index (CPI) inflation stood at a 69-month low of 3.16% in April.

The steady macroeconomic performance of the Indian economy amidst a volatile global outlook over the past few years has led to a sovereign credit rating upgrade from BBB (low) to BBB, with a stable outlook from the global credit ratings agency, Morningstar DBRS, noted the ministry.

The inflation outlook remains optimistic, supported by low core inflation and a decline in food prices, said the ministry. "Going forward, inflationary pressures stemming from food items are expected to remain low on account of a good rabi harvest, an increase in the area sown under summer crops, and healthy buffer stocks of foodgrains."

The IMD’s forecast of above-normal rainfall and falling crude oil prices further reinforces this disinflationary trend. Recent RBI surveys indicate a decline in inflation expectations, adding to the overall positive sentiment, the ministry noted. "Amidst the declining inflation rate, the monetary policy setting is conducive for fostering economic growth," it added.

The has cut the policy repo rate by 50 basis points in its past two monetary policy meetings, and is likely to cut 50 more in the current fiscal year. At present, the repo rate stands at 6 percent.

The ministry also said that the services sector continues to post healthy expansion, offsetting some of the softness in merchandise exports. The Indian rupee has remained relatively stable, and foreign exchange reserves continue to provide a cushion against external shocks, it stated.

“Government capital expenditure has played a pivotal role in supporting economic activity, providing a buffer against external shocks. The government’s direct tax exemptions and fiscal measures, along with the rate cuts from the RBI, are expected to further stimulate consumption and investment. These could accelerate the recovery and lift growth towards the upper end of forecasts of 6.3 per cent to 6.8 per cent, given in the latest Economic Survey," said the report.

India has the potential to remain as one of the most promising destinations for investment, amid global uncertainty, the ministry said. "Foreign direct investors are likely to respond positively to policies that strengthen the country’s medium-term growth prospects. In particular, policies that enhance the skills and productivity of the country’s young workforce can significantly strengthen the virtuous cycle of investment and growth," it said.

The outcome of a pause in the US-China reciprocal tariffs will be important, noted the ministry. Further, the passage of the US Budget Bill for the next financial year and the reaction in the US bond market, in light of the recent downgrade of the US sovereign credit rating by Moody’s, will also set the tone for financial markets globally in the final months of 2025, it added.

On government securities, the government said that Indian bond yields are softening on the back of low and stable inflation, and RBI debt purchases, while the bond yields on the US Treasury have tightened. "In turn, the risk premium of India’s G-Secs has decreased notably, reaching a historical low of just over 160 basis points versus the 10-year US Treasury yield. In the future, India will benefit from supply chain adjustments, diverse foreign direct investment sources, and greater collaboration with global investors seeking resilience and growth, supported by its existing trade connections," said the ministry.

Additionally, on states, the ministry said that an analysis of state finances reveals that with about a constant level of committed expenditure; states are facing less of a budget constraint to undertake discretionary revenue expenditure. “While many states running revenue surpluses could undertake more capex, states with revenue deficits may rein them in, while retaining capex spend," the ministry said.

Curbing states’ debt would not only enhance their own debt sustainability but also help reduce overall government debt, supporting improved fiscal health and greater macroeconomic stability, it added.