Only a competition-friendly economy will thrive: Finance ministry report | Economy & Policy News

India cannot afford to take its growth performance for granted amid worsening geopolitical polarisation and needs to take sustained, high-quality and reasonably swift decisions to reassure investors, while making the economy more “competition-friendly” rather than merely “business-friendly”, the Ministry of Finance said in its latest Monthly Economic Review on Thursday.

Flagging the risk of cross-border capital flows slowing down amid high global interest rates, the review authored by officials in the Department of Economic Affairs stressed that sustained high quality, consistent and reasonably swift decision-making will reassure investors. “More importantly, India must work on ensuring that the economy is more competition-friendly rather than business-friendly,” the officials noted. 

“Only a competitive economy will become a successful, innovative, and manufacturing economy. Improved governance and enhanced state capacity hold the key to a competitive Indian economy,” they added. 

The warning comes at a time when foreign investors have turned cautious on Indian equities, with foreign portfolio investors (FPIs) pulling out funds amid rising global bond yields, tariff pressures, and the absence of a domestic artificial intelligence (AI) play.

The ministry officials hoped that, over time, investors will come to appreciate the resilience and the sustenance of high growth in India in the post-Covid years. “As some of these clouds inevitably dissipate, India’s intrinsic growth potential will earn the attention it deserves from investors,” they said. 

The ministry review pegs economic growth at 7.3 per cent in the September quarter of FY27 following a robust 7.8 per cent expansion in the June quarter. 

“Growth momentum has extended into Q2FY27, though at a more measured pace. Geopolitical and geoeconomic uncertainty mean that India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter. That is the challenge for policymakers,” the review said. 

The officials said most high-frequency indicators point to continued economic activity in the early part of Q2. “Monsoon conditions have been more favourable than earlier anticipated, with kharif sowing close to last year’s levels across several crops. This supports the outlook for agricultural output and rural demand, although rabi prospects will require monitoring,” they added. 

However, the review maintained that sustaining growth will require preserving macroeconomic stability and strengthening economic resilience. 

It also warned that inflation arising due to supply shocks will restrain economic growth. “Interest rates in developed world are rising sharply. It will spill over into domestic bond yields as well. Apart from that, it means crossborder capital flows will slow as higher interest rates will persuade many investors to stay invested in domestic markets amidst pervasive and rising global uncertainty,” it said. 

The officials underlined upside risks to inflation from compounding climate, geopolitical and monetary headwinds. “A strong El Niño event could pose risks to the upcoming Rabi crop through heat stress and reduced soil moisture, although a positive Indian Ocean Dipole (IOD) may partially offset these effects. Geopolitical tensions and elevated crude oil prices could also add to imported inflation pressures, particularly amid the US Federal Reserve’s 25 bps rate hike in September,” the review said.

However, it said the Reserve Bank of India’s recent open market operations to absorb excess system liquidity could help maintain balanced financial conditions and contain undue demand-side overheating. “Meanwhile, festive demand and higher input costs could add some near-term pressure to prices. However, proactive supply-side and market measures by the Government could help contain these upside risks and provide a cushion against temporary price pressures,” it added.

Quoting robust goods and services exports, the review said that, at the current run rate of nearly $400 billion in the first five months of the year, India’s overall exports for the full financial year could approach $1 trillion. “That is a very strong confirmation that India’s trade agreements are providing impetus to India’s exports. It can only get better from here, with more trade agreements on the anvil,” it said. 

In August, the services trade surplus offset 65 per cent of the merchandise trade deficit, thereby reducing the overall trade deficit. 

The ministry officials said trade relations with the US remain “unsettled” following the passage of the Graham Bill through Congress and its presidential assent. The Bill empowers the President to impose tariffs of up to 100 per cent on countries that purchase Russian crude oil.