Can India become the world’s third largest economy by overcoming Germany sooner and then accomplish the Viksit Bharat goal by 2047, if the country’s traders take a pledge to sell only Swadeshi goods? Two alternative views have emerged on this question after prime minister Narendra Modi recently referred to the “uncertainty the world is going through,” and called upon political parties, leaders and citizens “to promote indigenous goods.”
While both sides agree that Donald Trump’s “America first” policy has upended the rule-based world trade order, and seriously set back progressive integration of the global economy, the jury is out on how India should respond to the situation.
The prominent view, echoed by the likes of former Planning Commission deputy chairman Montek Singh Ahluwalia and 16th Finance Commission chairman Arvind Panagariya, is that the country must the seize the moment of apparent crisis caused by the 50% US tariff on most of its goods, as an opportunity, and open up the economy faster, especially to non-US markets, Asia and Europe in particular.
At the same time, assorted structural reforms must be carried out to bolster the productive capacity of the economy, and strengthen the levers of domestic demand.
The ‘Open Up’ Argument: Embracing Global Integration Despite Turmoil
A divergent position is that since free markets have always been a “myth,” India should not allow itself to be beguiled into it any further. The country, from this standpoint, ought to focus on its self-interest, even if that means a more selective approach in transacting with the rest of the world, while leveraging its vast and fast-growing domestic market more aggressively.
Rather than focus on export-led growth, the policies must decisively aim at augmenting domestic capacity creation, and address capital scarcity with rapid credit (money) creation, and its effective deployment in productive, asset-creating ventures.
“In the current volatile global environment, India may need to slow down a bit. But to recover sharply by depending on domestic growth drivers, the country would need second-generation economic reforms in regulatory, legal, institutional and factor markets,” Madras School of Economics director N R Bhanumurthy said.
He noted that domestic consumption (both private and government) was 71% of the GDP in 2024-25. While Trump’s tariffs could have an impact on merchandise exports to the US, it does not affect services exports in which India is highly competitive (at the lower end of the value chain), Bhanumurthy said.
“We may have to factor in some impact on growth in exports to the US as some of the competing countries have lower tariffs. As of now it does not look like that either export of services or remittances would be affected as the tariff plan is primarily on goods,” Madan Sabnavis, chief economist at Bank of Baroda said. Even though the Indian economy is “majorly domestic-demand-driven”, Sabnavis feels India needs to increase its global presence to accelerate growth.
The Path to ‘Viksit Bharat’: The Role of Reforms and Domestic Sustainability
Over the last two and half decades, India grew by an average of roughly 6.5%, but for it to meet the “Viksit Bharat” goal, average growth needs to be much higher (8-8.5%).
“The domestic economy provides opportunities for both consumption (given the large population), and investment (outlays needed in infrastructure). Hence policies must work on both the segments to bring about accelerated growth and development as both these channels generate jobs and income,” Sabnavis said.
Sabnavis said the government would do well to design a package for exporters in the current environment. “This can be through PLIs, tax breaks, credit guarantees, TLTROs etc. so that the exporters are able to adjust to the new environment that has been presented by the tariff regime in the US.”
Jayant Dasgupta, trade expert and India’s former ambassador to the US, pointed out that merchandise exports are just over 10% of the GDP. But exports to the US are around a fifth of overall shipments, so it matters, he said. “Job losses are likely if the 50% US tariff continues. We will not be able to export many products like gems and jewellery and textile and clothing,” he said. Being still a “much smaller economic power” (compared to the US), India would still like a rules- based trade order. “It is in our interest that big and small economies play by the rules,” Dasgupta said.
Arpita Mukherjee, professor at Icrier, however, noted that the impact of the additional US tariff would largely be “sectoral” than on the overall economy. “India’s trade integration is very low when compared to countries like Vietnam. Our foreign trade in agriculture is even lower (than the average).”
Biswajit Dhar, distinguished professor at the Council for Social Development Biswajit Dhar said: “India should not be retracting from world trade just because of the actions of one country. We should be looking at more trade agreements. Remaining dependent on one country is problematic. We should leave the US alone to do what it wants to.”
As such, only a fifth of India’s economic output is driven by external demand. Also, the country’s share in global merchandise exports is just 2%, while on a purchasing power parity basis, India accounts for 8.25% of the world economy. The external debt is around 19% of the gross domestic product (GDP) at present, but forex reserves are as much as 91% of it. India receives 14.3% of the global remittances, while its economy is just around 3.4% of the global nominal output.
India is accused of being a high-tariff country, but its Customs revenue is just 4.5% of the aggregate import value, implying that tariffs aren’t high where it matters. On a trade-weighted basis, the tariff level more than halved to 27% between 1990 and 1992, and saw further sharp reductions in 2005 (from 23% to 13.9%) and 2008 (from 12% to 6%).
A reverse trend of tariff escalation was visible in the 2019-23 period, as the Modi government increased the duties on electronics, auto parts, and accorded higher protection to MSMEs and agriculture. Rates on a third of the tariff lines were raised over the years. But this trend has lately been arrested.
Indeed, economic data suggest that growth is increasingly fuelled by domestic demand. Household spending rose 12% on year in FY25, almost double the historical average rate. But the sustainability of this is doubtful, given that the savings rate is at a low ebb, and much of the household consumption expenditure is financed by debt.
But India is heavily reliant on imports for its energy needs. Besides, not just in traditional areas like fertilisers, but even in sunrise industries like semiconductors and electric vehicles, its ambitious plans hinge on imported inputs.
To be sure, integration of the Indian economy with the world (proportion of exports and imports in real GDP) has increased in the current century. It peaked at 56.1% in FY13 from 24.8% in FY01, but gradually declined to 40.3% in FY21. Between FY22 and FY25, it varied between 44.1% (FY25) and 47% (FY23), India Ratings chief economist DK Pant said. “A country can formulate and implement policies to improve domestic demand. However, it will be difficult for a country to generate and improve demand in other economies,” Pant said.
“While the income tax cut and declining inflation may help in reviving consumption, weak employment outlook and slower wage growth are impacting domestic consumption demand. A strategy to revive employment in the economy may help,” he added.
“India needs to focus on improving the productivity of factors in order to sustain a decent growth of 6-7%, especially in the absence of (sufficient) external demand. This is also an opportunity to undertake long-pending factor market reforms to catch-up with high income countries. One should also have policies that will help in structural transformation of the economy so that it could absorb more jobs for the bulging labour force participation rate in the country,” Bhanumurthy said. Reforms in education and agriculture are crucial for boosting productivity, he added.