Low international commodity prices likely to partly offset impact of higher tariffs, but US-India trade negotiations crucial: FinMin

Ongoing India-US trade negotiations is crucial to curb the downside risks to growth.

The downside risks to global growth are likely to keep international commodity prices in check, partly offsetting the impact of higher tariffs, but the ongoing India-US trade negotiations is crucial to curtail the risks to India's growth, the finance ministry said on Wednesday.

In this Monthly Economic Review for July report, the ministry said that while the immediate impact of recent US tariffs on Indian exports may appear limited, their secondary and tertiary effects on the economy pose challenges that must be addressed. "In this context, the ongoing India-US trade negotiations will be crucial," it said.

While near-term risks to economic activity, principally exports and capital formation, remain due to tariff-related uncertainties, the government and the private sector, acting in tandem and concert, can keep the disruptions to a minimum, the ministry noted, adding that setbacks eventually make us "stronger and more agile", if handled properly.

"If the near-term economic pain is absorbed more by those who have the ability and the financial strength to do so, then small and medium enterprises in downstream industries will emerge stronger from the trade imbroglio. Now is the time to demonstrate an understanding of national interest," said the ministry.

In line with the global shift towards diversification and strategic realignment, India is actively pursuing a diversified trade strategy to sustain its resilient trade performance, the ministry said. This includes the recently concluded FTA with the UK and EFTA and ongoing FTA negotiations with the US, EU, New Zealand, Chile, and Peru. "But, these initiatives will take time to show results and may not fully address the shortfall in exports to the United States that may arise if the current tariff rates on India persist," said the ministry.

On the domestic front, aided by above-normal precipitation and better sowing of kharif crops, the headline inflation may remain moderate in the near term. An increased market arrival in Q1, comfortable buffer stocks and better output prospects, coupled with stable global oil markets, might keep the prices of food grain moderate, the ministry noted.

The government is proactively managing risks and seizing opportunities by strengthening domestic capacity, promoting exports, diversifying supply chains and securing alternate import sources, it added.

To enhance economic growth amidst the challenging global landscape, the creation of a Task Force for next-generation reforms aims at further simplifying regulations, lowering compliance costs, and fostering a more enabling environment for start-ups, MSMEs, and entrepreneurs, the ministry said.

Second, the planned rollout of the GST reforms in the coming months, with an emphasis on reducing the tax burden on essential items, is expected to provide direct relief to households and boost consumption demand, it said. "Complementing these measures, the rating upgrade (by S&P Global) is anticipated to reduce the borrowing costs, attract greater foreign capital inflows, widen the access to global capital markets, boost disposable income, reduce inflationary pressures, cut input costs for businesses, and support growth." Earlier this month, S&P Global upgraded India’s sovereign ratings to 'BBB' from 'BBB-', after a gap of 18 years.

Amid global uncertainties, these government initiatives are charting a growth trajectory driven by long-term reforms that will boost disposable income, reduce inflationary pressures, and reduce costs for businesses, the ministry noted.

The deregulation efforts by the states, such as lifting restrictions on women working night shifts and improving the ease of doing business, will further enhance productivity and stimulate economic growth, it said.

On liquidity, the ministry said that favourable financial conditions in the economy support domestic activity. "Sufficient liquidity in the banking system has facilitated the transmission of the policy repo rate cuts to the credit markets, and the overall flow of financial resources to the commercial sector has remained at almost similar levels during April-July 2025 compared to the corresponding period of the previous year," it said.