India’s Second Chance at Economic Growth—Will It Rise or Fall?

India faces economic challenges from tariffs and a potential global slowdown, which could impact GDP growth and FDI inflows. Historically, India has reformed best during crises, and lowering import tariffs could boost its global trade integration. A key lesson from past growth periods is that reducing protectionist policies enhances exports. While India has focused on high-tech FDI, it has overlooked mid-tech, labor-intensive sectors where ASEAN nations, particularly Vietnam, have excelled. With potential US tariffs reshaping supply chains, India has a second chance to expand in electronics, apparel, and furniture. Key reforms, including trade agreements and currency flexibility, could drive future success.

India’s Second Chance at Economic Growth—Will It Rise or Fall?

India’s remarkable journey in services exports—from basic call centers to cutting-edge tech solutions—offers a blueprint for revitalizing its manufacturing sector. By climbing the value chain, the services sector demonstrated how strategic evolution can drive growth. Replicating this model in manufacturing could unlock similar success.

Navigating Immediate Pressures and Long-Term Goals

Current challenges loom large: retaliatory US tariffs could shave 0.3% off GDP growth, hitting agriculture, autos, and pharmaceuticals hard. A sluggish global economy may also deter foreign investment. Yet, India has historically turned crises into catalysts for reform. The question is whether today’s protectionist trends and China’s industrial overcapacity will stifle progress or spur transformative policies.

Insights from Economic History: Growth Through Openness

A comparison of India’s high-growth era (2000–2010) with the slower years (2010–2020) reveals a stark lesson: tariffs matter. Early trade liberalization integrated India into global markets, while later protectionism isolated its industries. China, meanwhile, leveraged imports to build domestic prowess before dominating exports. India, in contrast, opted for trade barriers that stifled competitiveness.

Foreign Investment: A Tale of Peaks and Valleys

Post-pandemic FDI surges, particularly in high-tech sectors, have since dwindled, reflecting fierce global competition. Developed nations like the US now absorb a quarter of global FDI, attracting capital with strong incentives. While India pursued high-tech investments, it overlooked mid-tech, labor-intensive sectors—such as apparel, furniture, and toys—where ASEAN nations like Vietnam thrived amid US-China trade tensions.

A New Window in Manufacturing

Potential US tariffs on major exporters could reshuffle supply chains again, offering India another shot at manufacturing growth. Sectors where Vietnam excelled—electronics, textiles, and footwear—align with India’s existing export capacities, which reach 15–40% of Vietnam’s output. With competitive wages and untapped potential, India could capture these markets. Notably, while China faces overcapacity in electronics and autos, there is still room for India to target less saturated sectors like apparel and furniture.

Policy Shifts Paving the Way

Recent reforms signal promising momentum:

1. Tariff Adjustments – The 2025 budget slashed duties on motorcycles, smartphone parts, and solar cells, with potential cuts for autos and pharmaceuticals.
2. FDI Focus – Prioritizing mid-tech investments while safeguarding sensitive sectors like defense.
3. Trade Partnerships – Pursuing a US trade deal by late 2025 and fast-tracking EU negotiations to boost textile exports, which are currently hampered by competitors’ FTAs.
4. Currency Strategy – A flexible rupee enhances export competitiveness, reassuring manufacturers.

The Road Ahead for Manufacturing

Mirroring its success in services, India must embrace a “learning-by-doing” approach in manufacturing, progressing from low-value to advanced production. However, this requires bold and sustained reforms beyond the initial steps taken.

Seizing the Moment

India’s second chance is here. The nation’s ability to harness global shifts, prioritize strategic sectors, and deepen reforms will determine whether this opportunity translates into lasting growth. The time for half-measures is over—only decisive action will secure India’s economic future.