External challenges ahead of Indian economy in 2025

Saibal Dasgupta has very succinctly explained the six factors that would impact the Indian economy in 2025. In this comprehensive analysis, he delves into the external challenges and influences that will shape the economic landscape, from monsoon stability to foreign investments and international trade dynamics. This article provides a thorough examination of the potential obstacles and opportunities lying ahead for India.

External challenges ahead of Indian economy in 2025

Saibal Dasgupta

India will outrace Japan to become the third-largest economy in GDP terms in 2025, according to several economists. It would also retain its position as the fastest-growing major economy.

Is this enough indication to suggest that the economy would fare well this year? Before we attempt to find an answer, it is essential to examine the impact of six factors that are beyond the control of the government. The first one is stable monsoon, which is never reliable.

The other factors—currency stability, foreign investment, international trade, oil imports and military spending —contain a variety of risks for the Indian economy. They are more often influenced by international developments with India playing little role.

Besides, the uncertainty about U.S. policies under the new president, Donald Trump, who takes charge on January 20 makes 2025 different from earlier years.

The towering image of Prime Minister Narendra Modi and the deft diplomacy of External Affairs Minister S. Jaishankar would play a key role in shielding India from some of the negative effects of international conflicts and adverse trade actions by the Trump administration.

Future of Rupee

The Indian rupee took a serious beating and lost 2.34% of its value against the U.S. dollar in 2024. It is expected to slide further from Rs 85 to a dollar and come close to the dangerous level of Rs 87. This may help exporters, but Indian imports would become dearer in 2025. We will be importing inflation as we pay more for little imports.

Military spending

Defence expenditure would shoot up because we will be using a weakened currency to buy arms. India is the fourth biggest buyer of military equipment after spending $83.6 billion on it in 2024. As much as 2.4% of India’s GDP went into military spending.

Pakistan is set to acquire 40 J-35 stealth fighters from China. This can change the military balance, and India might be prompted to make some quick off-the-shelf purchases of stealth fighters from other sources. The government decided to buy seven Project 17B stealth frigates for the Indian Navy, at an estimated cost of Rs 700 billion last September and followed it up with defence orders worth Rs 4.22 lakh crore to several companies including Hindustan Aeronautics Ltd., Mazagon Dock Shipbuilders Ltd. and Larsen & Toubro Ltd.

Oil imports

Fortunately, oil market experts have predicted that crude prices will largely remain stable in 2025 despite concerns about flare-ups in the Israel-Iran conflict. Fears of oil prices shooting up to $100 a barrel have largely vanished because of low demand from China and other major consumers. This is a cause for relief because India is 88% dependent on imported oil.

FDI inflows has been significant in the decade since 2014 when it amounted to $709.84 billion, accounting for 68.69% of the overall FDI inflow in the past 24 years.

But 2025 may prove to be less encouraging. Low consumer demand and reluctance of Indian private companies to make fresh investments are two important reasons why foreign investors would be slow in pouring funds in India. Foreign portfolio investors who pulled out Rs 1 lakh crores from Indian stocks in 2024 are not showing any signs of reversing their attitude. The U.S. market may seem more attractive to them after Trump takes over.

It is clear that external factors will impact the economy in 2025 in a big way. The government would be under pressure to find ways to boost the economy.

******

Saibal Dasgupta is a senior journalist who writes columns on foreign affairs and the economy for national dailies and news portals. He has also authored 'Running With the Dragon: How India Should Do Business with China,' a book published by Penguin.