India GDP Story: Domestic Gains, External Strains

The National Statistical Organisation (NSO) has reaffirmed its estimate for India’s GDP growth at 6.5% for fiscal 2025. This also confirms that the economy slowed from 9.2% growth in fiscal 2024. The deceleration was largely due to considerably weaker growth in fixed investment, while private consumption and exports showed recovery.

This fiscal, we expect some shift in the composition of the growth drivers. First, the sharp global turns will inflict some pain and are expected to slow exports. The direct impact of higher tariffs on India’s exports to the US will be felt, but the broader consequence of slower global/trade partner growth and reduced trade flows could likely be greater. Nonetheless, the overall hit to the Indian economy is expected to be limited due to a relatively smaller share of exports in GDP. Additionally, India’s services exports are expected to remain resilient in the face of global shocks, as they have in the past.

The slowdown in exports, driven by weakening global demand, was already evident in the March quarter. According to the trade data, this was mainly due to weaker performance in sectors like textiles, engineering goods, gems and jewellery, agriculture and allied, and chemicals. However, the outlook for June quarter exports could differ, as India and other countries may benefit from a temporary truce with the US and pre-shipment of exports.

The second key driver – private consumption – is expected to remain strong this year, though some base effect could impact its momentum.  

Domestically, most indicators are aligning to support consumption. Easing inflationary pressures, particularly with food inflation staying low, are expected to enhance purchasing power. With consumer price inflation expected to remain within the Reserve Bank of India’s (RBI) comfort zone, further rate cuts are expected.

The RBI has already reduced the policy repo rate by 50 basis points, and improved transmission mechanisms are helping to accelerate the decline in lending rates compared to previous interest rate downcycles. We expect the RBI to cut rates by another 50 basis points this fiscal, which should encourage borrowing. Additionally, the income tax provided to middle-income households is likely to support a portion of their spending this fiscal. Finally, robust rural demand, underpinned by last year’s strong agricultural output and the expectation of healthy monsoons (and output) this year, is poised to boost consumption.

Finally, the third key factor, which led to the deceleration in fiscal 2025 – fixed investments – saw some gains in the fourth quarter as government investment spending (centre and state) gained momentum. That being said, private investment in the fourth quarter was likely hindered by uncertainty around the expected tariff imposition by the US administration. A material lift in private investment could remain a challenge this fiscal as well. Three out of five factors that influence private corporate sector investments have turned supportive. One, corporate balance sheet position is now stronger. For Crisil-rated entities, the median gearing ratio has improved from 1.05 times in fiscal 2015 to an estimated 0.50 times in fiscal 2025 across corporates, indicating there is more than enough headroom in the corporate balance sheets to undertake debt-funded capex and improve lender position. Two, the lender's position has improved and improved. Gross non-performing assets (GNPA) are down to 2.4% of advances in March 2025, from a peak of 11.2% in March 2018, indicating increased room to fund credit needs in the economy. Three, there is increased policy support and intervention, such as the PLI scheme, reduction in corporate taxes, creation of large-scale infrastructure and, more recently announcement of safeguard duties to prevent dumping.

Two factors, however, remain unsupportive. The slower than expected recovery in private consumption post the pandemic. Consumption has been recovering, but the recovery remains uneven. The RBI’s consumer confidence survey shows that rural areas are witnessing a greater uplift in sentiments thanks to rising agricultural incomes, but recovery in urban areas remains sluggish. The other is the global uncertainty – a sure shot headwind in the short term that is keeping private corporates cautious about investments.

Globally too, heightened uncertainty is pinning down economic growth.

Uncertainty has climbed to new highs and is threatening to hurt global growth beyond 2025.

As the global economy undergoes a sharp reset on trade, business sentiments have weakened. Uncertainty induced by policy unpredictability has risen, and the biggest casualty is investments. Delays in business investment decision-making can deliver setbacks affecting global growth over the next few years. 87% of global economists interviewed in a recent survey by the World Economic Forum expect multinational corporations to delay strategic decisions and investments over the next three years.

In the backdrop, we expect India’s growth to be dominantly driven by domestic factors, although global headwinds are expected to deal some blows. For fiscal 2025, we estimate growth at 6.5% with risks tilted downwards. Global weakness due to trade disruptions lends a downside to this fiscal growth outlook. The ongoing trade deal between the US and India will remain monitorable.

The Indian Meteorological Department’s forecast of above-normal rains is encouraging. If the forecast, which would mark the second consecutive year of above-normal monsoon, comes true and rains are well distributed, the economy could expect another year of healthy agricultural output, which will not only strengthen rural demand but also keep food inflation under control.

Dipti Deshpande is principal economist at Crisil Ltd.

The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.