India’s gross domestic product (GDP) has consistently exceeded expectations after the Covid pandemic subsided. This trend has continued so far in this fiscal, given a first-quarter print of 7.8 per cent that trumped consensus by nearly a percentage point.
A notable macro development is the faster-than-anticipated decline in inflation that, until last fiscal, stayed elevated. This prompted the Reserve Bank of India (RBI) and professional forecasters to lower their inflation projections. Mint Road now expects consumer inflation to average 3.1 per cent, according to the August monetary policy review statement, compared to the 4 per cent forecast in April.
Clearly, India has been navigating the challenges well, despite facing 50 per cent tariffs from the US and global uncertainties reminiscent of the 2008 financial crisis and the 2020 pandemic. But growth is expected to be relatively slower in the second half of this fiscal as the effects of higher US tariffs and a slowing world begin to manifest. If the current tariff rates continue, the second half will see a materially higher burden on exports.
Given the macro mosaic of subdued inflation and strengthening exogenous headwinds, there is a case for the repo rate to be snipped another 25 basis points as early as October to offset the drags in the second half.
The US Federal Reserve’s recent move to slice 25 bps in its funds rate, and the expectation of another 50 bps of cuts by the end of 2025, give the RBI’s Monetary Policy Committee some more latitude to take the knife to the repo. While the global economy has been slowing slowly, the first half of 2025 demonstrated resilience, with growth in major economies, including India, exceeding expectations. This was on the back of front-loading of exports to the US before peak tariffs took effect, robust domestic demand and favourable financial conditions.
According to S&P Global, after growing at an above-trend rate of 2.8 per cent annually, the US economy is expected to slow to 1.9 per cent this year. The Chinese economy, the second largest, is projected to grow at 4.6 per cent, though it will decelerate to 4 per cent in the second half from a rapid 5.3 per cent in the first half due to tariffs and underwhelming stimulus. The Eurozone is seen ticking along at a modest 0.8 per cent. The Asia-Pacific region is en route to a minor slowdown to 4.4 per cent from 4.5 per cent.
We pencil India’s growth this fiscal at 6.5 per cent, flatlining with last fiscal, while nominal growth is expected to be slower at 9 per cent because of lower inflation. The first-quarter growth of 7.8 per cent was driven by strong private consumption, proactive government capital expenditure and a resilient services sector. A low-deflator effect also boosted the real GDP number.
The good thing is, the Purchasing Managers’ Index data suggest economic activity continued to be robust into the second quarter, with the indices for manufacturing and services averaging 59.1 and 61.7, respectively. Nevertheless, India’s growth in the second half will be relatively sluggish.
Crisil estimates the textiles, gems and jewellery, and seafood industries, which account for nearly 25 per cent of India’s total exports to the US, will be most affected by the prevailing tariffs. Micro, small, and medium enterprises (MSMEs), which have a share of more than 70 per cent in these sectors, will be hit hard. The chemicals sector, where MSMEs have a 40 per cent share, is also likely to feel the impact. Other concerns include sluggish private investments despite healthy corporate balance sheets. Government capital expenditure, after significant front-loading, is also expected to normalise. Additionally, flooding in Punjab, Rajasthan, and Telangana has damaged kharif crops, though a significant pan-India impact is not foreseen.
These challenges will be partially offset by India’s domestic strengths and other drivers. Ample rainfall has improved groundwater and reservoir conditions, which will benefit rabi crops that rely a lot on irrigation. Private consumption is emerging as a stronger theme this year compared with investments. Low food inflation supports discretionary spending, particularly among lower-income groups. Our calculations show the bottom 20 per cent of the population experienced inflation of 1.3-1.6 per cent, while the top 20 per cent faced 2.1-2.5 per cent inflation, because of the sharp drop in food inflation, which has a higher weight in the consumption basket of the lower-income groups.
Reductions in the GST rates will likely crank up consumption by the middle class, complementing income tax cuts and interest rate reductions implemented this year. Over time, simplifying the GST rate structure is expected to improve compliance and formalisation, structurally benefiting the economy.
Inflation is less of a concern this year, with the headline Consumer Price Index gauge averaging 2.4 per cent in the first five months of this fiscal. The reading based on the Wholesale Price Index, which reflects input prices, averaged just 0.1 per cent in the same period. China is contributing to disinflation in other economies with excess capacity and low prices — a trend expected to persist in the foreseeable future. This will keep imports cheaper for India.
Food inflation has been mild, averaging -0.1 per cent up to August in the current fiscal. It will pick up in the coming months, but is unlikely to derail our expectation of 3.2 per cent headline inflation this fiscal.
Core inflation, which reflects excess demand pressures, remains historically low despite the notable impact of rising gold prices. Excluding gold, core inflation drops to 3.1 per cent from 4.2 per cent, and headline inflation decreases to 1.6 per cent from 2.1 per cent for August.
Low crude oil prices help keep fuel inflation down and alleviate pressure on the current account. Additionally, the rationalisation of GST rates is likely to further reduce inflation. Crisil estimates that roughly 47 per cent of the basket now falls under the nil GST rate, compared with 35.3 per cent earlier. Crisil’s analytical teams estimated a 7.8 per cent drop in prices of standard two-wheelers, but a 6.9 per cent increase in premium variants, which is playing out. There is a passthrough of rate cuts in some consumption categories, though.
As the world gravitates towards more protectionist policies and taller tariff barriers, accelerating economic reforms becomes crucial to enhance India’s growth potential and mitigate external risks. In this uncertain climate, foreign trade agreements present a strategic opportunity to boost exports by reducing tariff barriers and establishing stable trade policies.
While these measures are important, there may be an urgent need to provide targeted monetary and fiscal support to small enterprises facing tariff challenges.
The writer is chief economist, CRISIL
