India’s growth estimate for FY25 has been marked at 6.6 per cent by Axis Bank, 6.5 per cent by Care Edge Ratings, and 6.5 per cent by Asian Development Bank till date. This brings focus to China +1 strategy as global supply chains diversify away from China.
While India continues to benefit from its thriving services sector, economists argue that addressing gaps in foreign direct investment (FDI) and enhancing manufacturing competitiveness will be crucial for the country’s future role in the global economy.
Muted External Demand and Growth Expectations
India’s goods exports are expected to grow at a modest 2.5 per cent, reflecting muted external demand as global trade dynamics turn more protectionist. Rajani Sinha, Chief Economist at Care Edge Ratings, stated that India’s growth will need to lean on domestic demand as the anchor. “What will be critical for India is to rely on domestic demand, especially as global trade faces more protectionist pressures,” she said.
Smaller economies like Vietnam and Indonesia have effectively positioned themselves as preferred investment destinations under the China +1 strategy, successfully attracting global companies looking to reduce dependency on China.
An Axis Bank India Outlook 2025 report supports this view, noting that despite efforts to diversify supply chains, China’s manufacturing dominance remains unshaken. India’s challenge will be to carve out a competitive edge as global shifts in production continue to evolve.
FDI Gaps in Manufacturing Growth
India’s efforts to attract global manufacturing investments through initiatives like the Production-Linked Incentive (PLI) schemes have shown limited success. While sectors such as electronics have seen some benefits, FDI inflows into India’s manufacturing sector remain far below potential. Sinha pointed out, “Countries like Vietnam have outpaced India due to quicker reforms and a more business-friendly environment.”
Sachin Gupta, Chief Rating Officer and Executive Director at Care Edge Ratings, underscores the urgency of a more focused government strategy. “India must address its FDI challenges head-on. The current level of investment under the China +1 strategy is insufficient to meet the country’s manufacturing ambitions,” Gupta remarked.
Despite challenges in manufacturing, India’s services sector continues to have an edge. The IT-enabled services and global capability centers are playing an important role, offering strong support to India’s external accounts and acting as a buffer during global economic shifts. According to Sinha, the services sector remains resilient and serves as a stabilising force even as global trade dynamics remain uneven.
Risks for India
Despite its potential, India’s high tariff regime poses a risk to its manufacturing ambitions. “India has the highest tariffs among major economies, making it vulnerable to reciprocal trade actions, particularly in sectors such as textiles, chemicals, and electrical machinery,” the Axis Bank report highlighted.
Global trade uncertainty and tariff shocks could also delay the expected benefits from supply chain diversification. Much of global trade growth continues to come from U S imports and Chinese exports, with diversification efforts yet to produce significant shifts.
Global Trade Outlook
As protectionist policies gain traction globally, India’s ability to leverage the China +1 strategy will depend heavily on addressing infrastructure gaps, improving the ease of doing business, and implementing FDI-friendly reforms.
“Exports ex-China have stagnated, highlighting the difficulty of achieving significant supply chain diversification in the short term,” said the report.. For India, this means accelerating reforms to attract large-scale investments and ensure that domestic manufacturing becomes globally competitive.
Sachin Gupta also stated the importance of staying agile in the face of changing global trade policies. “The global trade tone, especially under Trump’s tariff policies, will significantly shape the trajectory of protectionism. India must remain flexible and responsive to these shifts,” he said.
