India’s economy: Cloudy with a chance of silver lining?

Is there a silver lining to the clouds shrouding India’s economy? There could be, as the nation awaits a magic wand before its demographic dividend disappears.
First, the bad news: 2026 has continued the spate of troubles that have been lashing the Indian economy, right from US tariff troubles to oil prices wreaking havoc. Add to that an unstable job scenario, as well as the newfound fears over artificial intelligence (AI) hitting India’s golden goose, the IT and IT services industry.

For starters, Crisil estimates India’s current account deficit (CAD) to rise to 1.5 per cent of GDP by the end of this financial year, from 0.6 per cent presently. CAD essentially means the country is spending more than it is earning from trade, leading to a negative balance in the exchequer.

While CAD in itself is not a worry as such, the expected rise surely is. Also, particularly since there is nothing much the authorities can do within their control. Rather unfortunate, too, considering how much effort the government had put into trying to balance CAD in the post-Covid years. But with rising international oil prices, primarily due to wars like those in Iran and Ukraine, beyond the control of internal policy, there is nothing much that can be done here other than hope for the best.

The glimmer of hope here is a slight improvement seen in the import and export scenario – exports to India’s primary trade partners like the US and the UAE rebounded last month, and most promisingly, oil and other core imports moderated. Oil imports moderated from 40 per cent in June to just 17.7 per cent last month, while core imports came down from 31.4 per cent to 20.3 per cent.

While improvement in the oil import statistics does appear optimistic, for the overall bottom line, it is of no solace. The overall merchandise trade deficit increased from 30 billion dollars in June to 32 billion in July. Note that this was just 27 billion dollars a year ago.

While India always had a deficiency when it came to its merchandise trade, it was always the services export that softened the blow. Even now, on the Services side, India does have a surplus of about 17 billion dollars. But the improvement has been negligible, considering it was 16.4 billion just a month ago. And worse, the tailwinds battering IT mean this cannot be relied on for too long.

In fact, another Crisil study released a few days ago suggests that it is dark cloud days ahead for Indian IT. From exuberant 20 per cent plus growth in the post-Covid years, Indian IT in the age of AI is a poor version of the poster boy that carried the Indian economy during its boom years. Crisil’s estimate is that India’s IT services sector will enter negative territory by this financial year, declining anywhere from 1 per cent to 3 per cent this year and as much as 4 per cent by next year.

While the fall in the value of the Rupee as well as cost-cutting and cutting of jobs could help the companies steer through this year, that may not be the case next year on, feel Aditya Jhaver, director, Crisil Ratings. “That cushion could narrow from next fiscal [year] as revenue pressures persist, talent costs rise, AI investments continue and forex support moderates.”

In such a situation, what could be that silver lining? India’s free trade agreements (FTAs) could well be that silver bullet. “Beyond improving market access, these agreements will seek to expand India’s export footprint in high-potential markets, diversify access to critical imports, and strengthen supply-chain resilience,” according to a recent study by Deloitte economists Rumki Majumdar and Debdatta Ghatak.