Q2 GDP Preview: India’s Economic Growth Outlook Muddied By US Trade Deal Woes

India’s economy and financial markets are sending conflicting signals about the growth outlook, complicating policymakers’ efforts to support activity as high US tariffs weigh on prospects.

Gross domestic product likely expanded at a rapid pace of more than 7% last quarter, yet inflation is at a record low of under 1%, largely because of a collapse in food prices. The rupee has plunged to an all-time low of about 90 to the dollar, while the stock market is soaring. Imports surged last month after the government cut taxes, but exports have plummeted.

President Donald Trump’s punitive 50% tariffs, the highest among most major economies, has weighed on sentiment as exporters see orders from the US dry up. Prime Minister Narendra Modi is trying to bolster the economy, focusing on spurring consumer and business spending, but the conflicting economic signals suggest investors aren’t convinced yet about the outlook.

“The dichotomy of message from various indicators alludes to the fact that the economy is not likely firing on all cylinders,” said Dhiraj Nim, economist at ANZ Banking Group Ltd. “While some business segments report solid results, other complain of weakening order book and investment appetite.”

The government has so far stuck to its forecasts, predicting growth of 6.3%-6.8% in the year through March. Data to be released Friday may show the economy expanded 7.4% in the July to September quarter, according to economists surveyed by Bloomberg. 

Yet the headline figures mask underlying weakness in some sectors. Growth is being fueled by government investment, which has surged 40% so far this fiscal year, according to ratings firm CareEdge, while private investment remains sluggish. 

And although consumption grew at a rapid clip of 7% in the April–June quarter, it was lower than overall GDP growth of 7.8%.

“Consumption is growing, it’s doing good, but it could be so much better,” said Alexandra Hermann, lead economist at Oxford Economics Ltd. “Ideally, consumption growth should be higher than GDP growth in a country like India.”

Goods and services tax cuts in September ahead of the festive season gave a short-term boost to spending. Two-wheeler registrations and car sales both hit monthly records, while GST collections climbed nearly 4.6% from a year earlier to around Rs 2 trillion in October, the highest in five months. But economists question how long that momentum will last.

“The GST cuts and festive demand unsurprisingly showed up in resurgent sales, but cumulative performance across August to October, that discounts pent-up demand, points to a more measured pickup,” said Aurodeep Nandi, India economist at Nomura Group.

A trade deal with the US could lift sentiment by removing uncertainty, but a prolonged stalemate may weigh heavily on the outlook.

“We must not underplay the risks from tariffs which has begun to show up and can worsen if a trade deal isn’t arrived at in near future,” said Nim. “The ramifications for jobs and incomes in the low skilled sectors can be profound,” he added, pointing to rising stress in exports.

While officials in New Delhi have repeatedly said in recent weeks that a trade deal with Washington is close, the International Monetary Fund has cut its projection for India’s growth next financial year.

The Washington-based lender expects the economy to expand 6.2% in the year starting April, down from its July forecast of 6.4%, due to high US tariffs. Indian officials, however, viewed the IMF’s growth impact estimate as overstated, pointing to the country’s ability to tap other export markets.

India’s market shares are rising in the UAE, China, Hong Kong and other Asian economies that buy marine products, “suggesting that diversification will increasingly buffer India against external shocks,” said Soumya Kanti Ghosh, chief economist at State Bank of India and a member of the prime minister’s advisory panel.

The Modi government is also planning to push through a dozen major bills in the upcoming parliament session to boost investment, following the recent implementation of long-awaited labor reforms expected to lift manufacturing and employment.