Executive Summary
- India’s economy is projected to demonstrate resilience against recently doubled U.S. tariffs, driven by stronger-than-expected economic growth and improving domestic consumption.
- India’s latest quarterly GDP expanded by a robust 7.8%, and domestic consumption is expected to receive a significant boost from a central bank rate cut and impending GST reforms.
- Despite the optimistic outlook, India faces challenges including a weakening rupee, significant foreign institutional investor sell-offs, and potential impacts on its fiscal position.
The Story So Far
- India’s economy is projected to demonstrate resilience against recently doubled U.S. tariffs, primarily driven by stronger-than-expected GDP growth of 7.8%. This robust performance is further supported by improving domestic consumption, which is expected to receive a significant boost from a central bank rate cut and impending Goods and Services Tax reforms designed to simplify the tax structure and reduce rates, alongside strategic government investment providing a crucial buffer against external pressures.
Why This Matters
- India’s economy is largely projected to withstand the impact of recently doubled U.S. tariffs, buoyed by stronger-than-expected domestic growth, robust consumption driven by upcoming GST reforms, and strategic government investments. Nevertheless, the country faces notable challenges including a weakening rupee and significant foreign capital outflows, which could pressure its fiscal position and currency stability despite the overall optimistic economic outlook.
Who Thinks What?
- Analysts from institutions like Goldman Sachs, Crisil, OCBC Global Markets Research, the World Bank, and the IMF largely maintain an optimistic outlook for India’s economy, projecting strong growth driven by robust domestic consumption, lower inflation, impending tax reforms, and strategic government investment, which are expected to largely mitigate the impact of new U.S. tariffs.
- Conversely, some experts, including OCBC’s Ashhish Vaidya, highlight significant challenges and risks to India’s economy, such as the weakening rupee, substantial foreign institutional investor sell-offs in equity markets, and potential difficulties in maintaining fiscal consolidation targets, which could be exacerbated by global uncertainties and rising oil prices.
India’s economy is projected to demonstrate resilience against recently doubled U.S. tariffs, driven by stronger-than-expected economic growth and improving domestic consumption. The U.S. tariffs, which increased to as much as 50% on most Indian imports last week, have raised economic concerns. However, India’s quarterly GDP data subsequently showed the economy expanding by 7.8%, surpassing estimates. Analysts from Goldman Sachs and other institutions have updated their forecasts, largely maintaining optimistic outlooks for the country’s economic trajectory, supported by factors like lower inflation and impending tax reforms.
Economic Growth Outperforms Expectations
Goldman Sachs recently raised India’s real GDP growth forecast for calendar year 2025 to 7.1% and for fiscal year 2026 to 6.7%, an increase of 60 basis points. This improved projection accounts for the negative impact of the new U.S. tariffs. India’s latest quarterly GDP data, released two days after the tariffs took effect, indicated a robust 7.8% expansion.
This growth was primarily propelled by strong performances in the manufacturing, construction, and services sectors. Lower-than-expected inflation also contributed to the uplift in real GDP growth. While OCBC Global Markets Research maintained its average GDP growth forecast at 6% for fiscal year 2026, the World Bank and International Monetary Fund project India’s economy to grow by 6.3% and 6.4%, respectively, for the same fiscal year.
Boost to Domestic Consumption
Domestic consumption is expected to receive a significant boost from several policy measures and economic trends. The central bank’s 50-basis-point rate cut in June, with expectations of another later this year, could increase consumer spending power. Furthermore, Prime Minister Narendra Modi announced a major revamp of the Goods and Services Tax (GST) on August 15.
The current four-slab GST structure (5%, 12%, 18%, 28%) is anticipated to be simplified into a two-rate system of 5% and 18%, moving most goods to lower tax rates. These reforms, expected to boost consumption, are slated to come into effect by Diwali in October, a period traditionally marked by increased spending in India. OCBC Global Markets Research noted that lower inflationary pressures, the impending GST adjustments, and the ongoing festive season will support private consumption through the third quarter of 2025.
Crisil, an Indian credit rating agency, also anticipates robust consumer demand, attributing it to healthy rural incomes, lower inflation and interest rates, and government tax relief. The agency added that robust agricultural production, with monsoon sowing up 3.4% year-on-year as of August 22, will help keep food inflation in check. Crisil expects private consumption to be the primary driver of GDP growth in 2025.
Challenges and Risks
Despite the optimistic outlook, India faces several economic challenges, notably the weakening rupee and potential impacts on its fiscal position. The Indian rupee recently reached an all-time low, closing at 88.3 against the U.S. dollar, and has continued to hover around that level. Ashhish Vaidya, managing director and head of treasury India global financial markets at OCBC, told CNBC that continued global uncertainties could see the rupee further depreciate to 89-89.5 against the USD, particularly if oil prices surge.
Beyond the impact on exports due to U.S. tariffs, Indian equity markets have experienced significant sell-offs by foreign institutional investors, amounting to nearly $4 billion in August alone and $16 billion year-to-date. As a net importing nation, a significantly weaker currency will inevitably raise India’s import bill. This, coupled with potential revenue softness from tax cuts, could challenge the fiscal consolidation efforts of Asia’s second-largest economy.
Any deviation from the government’s fiscal deficit target of 4.4% of GDP could further weaken the currency. While the government has affirmed its commitment to meeting this target, Goldman Sachs suggests that the Reserve Bank of India’s management of its sizable short-forward position, along with new tariffs and subdued portfolio flows, is likely to keep the Indian Rupee under pressure and an underperformer among other emerging market Asian currencies.
Government Investment as a Buffer
Crisil also highlighted that government investment spending is expected to provide a crucial buffer against the impact of U.S. tariffs, a global trade slowdown, and broader geopolitical uncertainties. While acknowledging that U.S. tariffs and slowing global growth pose key downside risks through exports and investments, Crisil maintains that domestic factors will largely mitigate these external pressures.
India’s economy appears poised to navigate the challenges posed by new U.S. tariffs, buoyed by strong domestic growth drivers and proactive policy measures. While currency weakness and capital outflows present notable risks, robust consumption, impending tax reforms, and strategic government investments are expected to underpin the country’s economic resilience in the face of global headwinds.
