A trade deal with US will boost confidence

THE Reserve Bank of India (RBI) recently raised its gross domestic product (GDP) growth forecast for India by a good 30 basis points to 6.8 per cent this fiscal. The International Monetary Fund followed suit, raising it to 6.6 per cent from 6.4 per cent. Ergo, India will continue to be the fastest-growing large economy in 2025. However, it will not be the only country whose growth forecast is being upgraded. The US, countries in the Euro area and emerging markets are also expected to grow faster, for varied reasons. This is because global economic activity has been resilient despite higher tariffs and persistent geopolitical uncertainties.

The US economy is being driven by investments in artificial intelligence (AI) and related technologies and infrastructure, particularly in data centres. This has increased demand for construction and other necessary inputs for data centres, both domestically and internationally, particularly from Europe and Asia. According to S&P Global, nearly half of the projected 1.9 per cent GDP growth in the US in 2025 will be attributed to such investments. Although some view AI investments as risky, they are currently supporting economic activity in the country.

In emerging markets and Asia, growth is expected to have two distinct phases. The first half of the year benefited from accelerated exports to the US to skirt the higher tariffs set to take effect in the second half of the year. This trend may not continue in the latter part of the year as tariffs rise.

India faces the highest tariffs in Asia. Although sectors such as pharmaceuticals and smartphones, which constitute a fourth of India's exports to the US, have been exempted, the absence of a trade deal will lead to substantially higher tariffs in the second half of the year. Yet, India's growth forecast has been raised.

The current fiscal began on a robust note, with GDP growth rising to 7.8 per cent in the first quarter and exceeding expectations. This was driven by private consumption, government capital expenditure and the services sector and triggered upward revisions in forecasts.

Factors beyond the country's control but with significant economic implications have been largely favourable. Crude oil prices are expected to decline to an average of $64 per barrel this fiscal from $78.9 per barrel in the previous one. Lower crude prices help keep inflation and the current account deficit (CAD) in check, supporting growth.

Monsoon rains were above normal in calendar years 2024 and 2025, with the country receiving 8 per cent more rainfall than the long period average at the all-India level. However, rainfall distribution was uneven, with the number of regions experiencing excess rainfall doubling in 2025.

While there has been crop damage in Punjab, Rajasthan, Haryana and Telangana, other regions are expected to perform well. Additionally, rice and wheat stocks are above buffer norms and winter crops, which are largely irrigated, are expected to benefit from improved groundwater and reservoir levels.

The resilience of the Indian economy is supported by healthy external indicators and strong balance sheets. The CAD is low (0.2 per cent of the GDP in the first quarter) and is expected to stay below 1 per cent of the GDP for the full fiscal.

Financing a low CAD can be challenging in today's uncertain environment with volatile capital flows. In recent months, India has experienced net capital outflows. However, a low CAD combined with a healthy foreign exchange reserve means India is not reliant on foreign inflows for its financing.

Nearly half of India's exports are services, which have been less affected than goods trade by the new US tariff regime. In the first five months of this fiscal, services exports grew 10.6 per cent, outpacing goods exports growth at 3.9 per cent.

Large- and mid-sized corporations have strong balance sheets. A recent study by Crisil Ratings highlighted that corporate credit quality is robust, with ratings upgrades outnumbering downgrades by more than two-to-one. Despite healthy balance sheets, corporations have been hesitant to invest aggressively amid global uncertainty.

Banks also have strong balance sheets with low non-performing assets, providing a buffer in uncertain times. Thus, both lenders and borrowers enjoy healthy balance sheets.

For cyclical economic support, policymakers use monetary and fiscal measures, depending on the available policy space.

The Monetary Policy Committee (MPC) of the RBI has reduced the repo rate by one percentage point in calendar year 2025 and announced a staggered cut of the same magnitude in the cash reserve ratio (CRR) to accelerate the transmission of the rate cuts to lending rates. These reductions were made possible by a sharp decline in consumer inflation, which is now expected to be 2.6 per cent this fiscal.

Although the MPC did not cut rates in its October policy meeting, it has taken steps to facilitate bank lending, such as reducing risk weights for non-banking financial companies and easing regulatory norms for lending against listed debt securities and equity shares.

These measures are expected to support credit growth in the coming months. Another rate cut this fiscal appears likely.

In contrast, the government's fiscal space is limited because of the need to reduce the fiscal deficit and public debt. Capital expenditure by the Central government was front-loaded in the first half and is likely to normalise in the second half.

The ongoing reforms in the goods and services tax (GST) will enhance compliance and further formalise the economy over time. These reforms will also boost private consumption, which makes up 57 per cent of India's GDP.

Lower GST rates will support middle-class consumption, complementing the income tax cuts and interest rate reductions introduced this year. It will help reduce inflation. These changes are likely to make consumption a more significant driver of growth compared with investment this fiscal.

Securing a trade deal with the US would alleviate uncertainty and boost confidence, particularly benefiting labour-intensive industries such as textiles, gems and jewellery and seafood, which together represent nearly a quarter of India's exports to the US.

These sectors, with over two-thirds of the contribution from micro, small and medium enterprises, have been rendered uncompetitive in the US market by the extremely high tariffs.

Despite its domestic strengths, the Indian economy is vulnerable to adverse global developments owing to its increasing integration with the world in terms of trade and capital flows.

High public debt levels in many countries, inflated asset prices (especially safe-haven assets like gold) and ongoing geopolitical and tariff uncertainties make the global environment complex and could challenge India's resilience.