Friday, 20 Jun, 2025
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The US GDP contraction is driven by rising imports, not weakened demand, indicating sustained spending. Indian exporters have a chance to capitalize on this momentum before it fades.
The US economy shrank by 0.3 per cent in Q1 2025, marking its first contraction since early 2022. However, beneath this economic dip lies a silver lining for Indian exporters: a sharp uptick in US import demand. Despite the overall GDP decline, this rise in imports presents a short-term opportunity for India's export-driven industries, particularly in sectors like electronics, engineering goods, textiles, and pharmaceuticals, which have shown strong recent performance in the US market.
At the heart of the contraction was a historic surge in imports, which ballooned at an annualized rate of 41.3 per cent, with goods imports soaring nearly 51 per cent. The resulting drag from net exports — a massive 4.83 percentage points — was more than enough to offset solid domestic fundamentals, including a 1.8 per cent rise in personal consumption and a robust 21.9 per cent jump in private investment.
For India, which has been grappling with muted global trade flows, this sudden appetite from the US is timely. American consumers and firms ramping up purchases often spell good news for Indian manufacturers, particularly in pharmaceuticals, electronics, automotive components, and IT services. The front-loading of imports — reportedly driven by tariff fears linked to proposals from President Donald Trump — might be short-lived, but it offers a chance to shore up sagging export earnings.
India’s export performance remains fragile, weighed down by weak European demand and geopolitical tensions in West Asia. A steady US import appetite offers some relief, but it is no guarantee. Any softening in US domestic demand could swiftly reverse recent gains, leaving India vulnerable to renewed export headwinds.
Still, New Delhi has reason to be cautiously optimistic. The contraction in US GDP doesn’t reflect a collapse in demand but rather an accounting quirk tied to ballooning imports — a signal that America’s consumers and businesses are still spending. For Indian exporters, the opportunity now is to lean into that momentum — before the window closes.
Notably, the US trade deficit, which reduced the GDP by 4.83 percentage points in Q1 FY25, marks the largest negative impact from net exports since 1947, according to official data from the Bureau of Economic Analysis. Since the global financial crisis in 2008, the US economy has faced contraction in 12 quarters. Plus, negative growth in private consumption and investment during Q3 CY08 to Q2 CY09 contributed to the downturn, a trend also observed in Q1 and Q2 of 2020 during the onset of the Covid-19 pandemic.
The scenario in Q1 CY25 mirrors the situation from Q1 CY22, where high growth in net imports outweighed the positive growth in private consumption and investment, resulting in a decline in domestic output. This suggests a recurring challenge in balancing the domestic economy’s growth with external trade dynamics, potentially impacting overall economic performance.
In Q4 FY25 (which corresponds to Q1 CY25 for the US), India exported $26.58 billion worth of goods to the US, marking the highest export figure for any quarter of FY25, as per data from the Indian government’s NIRYAT portal. A significant portion of this export value was driven by electronics and engineering goods, amounting to $6.62 billion and $5.18 billion respectively.
Of late, Apple CEO Tim Cook stated that most iPhones sold in the US during Q2 CY25 will carry India as their “country of origin,” underscoring India’s growing prominence as a manufacturing hub for electronics. Electronics and engineering goods have emerged as the largest category of exports from India to the US in FY25, highlighting the success of the country’s manufacturing sector.
According to the ‘Purchased in America, 2023’ report, 37 percent of the manufactured goods purchased in the US in 2023 were imported final goods. The apparel and leather sector accounted for a significant 88 percent of these imports, the highest among all categories. Additionally, 69 percent of computer and electronic products sold in the US were imported final goods, highlighting the growing reliance on foreign manufacturing, especially in high-demand sectors like electronics and apparel.
