Market Radar India: Growth Goals Meet a Sliding Rupee and Key Domestic Hurdles

The Macro View: Confidence vs Currency

This week, India’s top leadership projected high confidence in the nation's economic trajectory, with Finance Minister Nirmala Sitharaman stating that India is on track to soon become the world's third-largest economy. 

Having already climbed from the tenth to the fifth largest economy since 2014, Sitharaman argued this economic strength is what allows India to stand tall and defend its interests on the global stage.

Countering recent criticism from US President Donald Trump, who referred to India's economy as “dead”, Sitharaman pointed to India's rapid progress toward the Viksit Bharat 2047 goal, citing that 25 million people have been lifted out of multidimensional poverty as proof of this strength. 

Commerce Minister Piyush Goyal echoed this sentiment, predicting India would overtake Germany - currently the world's third-largest economy - within the next two years.

However, this confident outlook faces significant external headwinds, as the Indian rupee approached a record low this week. 

It was pressured by a strengthening US dollar while traders reduced bets on a Federal Reserve rate cut, causing the rupee to weaken to 88.7437 per dollar and close in on its September record of 88.8050. 

Analysts noted that the Reserve Bank of India (RBI), which had previously sold dollars to defend that level, was not seen intervening strongly this time, with some economists suggesting they may be allowing the rupee to adjust naturally, using it as an automatic stabiliser to cushion growth.

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The Small Business Engine and its Productivity Hurdle

While high-level ambitions dominate the headlines, India's domestic growth engine faces its own deep-seated challenges. 

The economy started the fiscal year strongly, posting 7.8% GDP growth in the second quarter, driven by a 7% rise in private consumption, a 7.8% increase in investment, and a 9.3% expansion in the services sector.

A new report from Deloitte identifies micro, small, and medium enterprises (MSMEs) as the bedrock for broad-based growth. This sector is critical, accounting for nearly 30% of India's GDP, 45% of its exports, and providing livelihoods for over 240 million people.

Despite their importance, Indian MSMEs face a severe productivity gap. According to a World Bank report, their productivity is only about 18% of large enterprises in India, compared to a 45-70% level seen in OECD countries, a gap driven by structural bottlenecks.

Said bottlenecks include limited access to finance, with an estimated credit gap of INR 30 lakh crore, as well as outdated technology and weak integration into global value chains. 

Addressing these challenges is crucial; one report estimates that increasing MSME productivity could add an equivalent of 10% to India's GDP.

Exporting Human Capital

As India navigates these short-term pressures and long-term structural issues, a new report highlights a powerful fuel for the economy: its people. 

This suggests India's next big export may be its labour force, as the government seeks to connect its abundant young workers with countries facing labour shortages.

Developed economies like Germany and Japan are facing ageing populations and shrinking workforces, while tens of millions of young Indians enter the job market annually. 

To formalise this labour mobility, the government has introduced the Overseas Mobility (Facilitation and Welfare) Bill, 2025, aiming to create safe and regulated pathways for overseas employment.

This strategy builds on a powerful existing trend, as India is already the world's largest recipient of diaspora remittances, hitting a record USD 135.46 billion in the last fiscal year. 

These inflows have become a critical buffer for the economy, covering nearly 47% of the trade deficit in FY25 and establishing themselves as a stable source of external financing that is often larger than foreign direct investment (FDI).