After growing at 8.2 per cent in 2023-24, India's GDP growth slumping to 5.4 per cent in the second quarter (since revised upwards to 5.6 per cent) had come as a huge negative surprise. The economy has rebounded from the seven-quarter low to 6.2 per cent in the October-December quarter, in a good news of sorts.
However, the GDP growth was still lower than the 6.8 per cent that the Reserve Bank had expected for the quarter. Importantly, with US President Donald Trump announcing reciprocal import tariffs on many countries, any disruptions in trade and a slowdown in global growth will hurt exports.
So, even as Finance Minister Nirmala Sitharaman announced major relief on the income tax front to boost domestic consumption, concerns abound on the external front and in turn the outlook ahead for the economy in the fourth quarter and the next year.
"Rising tariff threats and slowing global demand risk to turn exports into a drag on growth in the upcoming fiscal year 2025-26, but modest fiscal stimulus announced in February and RBI’s monetary policy easing should support domestic demand, sustaining growth at 6.4," said Hanna Luchnikava-Schorsch, Head of APAC Economics at S&P Global Market Intelligence.
S&P believes improving rural demand and increased government expenditure should keep the growth momentum sustained in the January-March quarter. For the year ending March 2025, it expects the GDP to grow 6.4 per cent and then sustain at that level next year.
What was a positive in the December quarter was a sharp increase in exports in certain categories, despite the overall decline in merchandise exports between November-January 2025.
S&P noted that electronic exports had grown 33.7 per cent over ten months to January 2025. In January alone, electronic exports surged close to 79 per cent.
However, these export tailwinds could very well turn into headwinds next year, as this surge in electronic exports may have at a cost of future demand post restocking, feels S&P.
"The newly proposed US responsive trade policy plan that would increase US import duties to match those of trading partners is an additional risk, with up to 17 per cent of India’s total merchandise exports possibly facing higher tariff should the policy be implemented," according to its analysis.
On the domestic front, S&P expects the personal income tax concessions announced in the Budget along with the 25 basis points repo rate cut by the Reserve Bank in February, apart from other liquidity measures should lead to a resilient domestic demand. It expects the RBI to cut interest rates at least one more time in April, although the depreciating rupee may constrain further easing beyond that.
Upasana Chachra, Morgan Stanley's chief India economist is expecting GDP growth to pick up further to 6.7 per cent in the fourth quarter and growth for the current full financial year should be at 6.3 per cent.
"The confluence of a favourable fiscal policy that supports both capex and consumption, easing monetary policy across all its levers—i.e., rates, liquidity and regulations and robust services exports—that augur well for the job market outlook is likely to aid the growth momentum," said Chachra.
HSBC's Chief India and Indonesia Economist Pranjul Bhandari, though, says there are enough reasons to not take growth for granted.
"Manufacturing growth was rather sluggish, despite fervent global restocking activity. Investment data (gross fixed capital formation) for the first three quarters of the year had been lower than last year (6 per cent versus 9.8 per cent). Imports weakened meaningfully, which is another way of gauging domestic demand," noted Bhandari.
She sees growth rising to around 6.5 per cent in the March quarter, which is also HSBC's estimate for India's potential growth.
"There are downside risks to growth from the uncertainty around tariffs, but if the economy continues to take the right policy steps (lowering import tariffs, signing trade agreements, welcoming regional FDI and keeping the rupee flexible), there could be growth gains in the future," pointed Bhandari.
There are several things to watch out for beyond the trade tariff-driven uncertainties in the global market. Domestically, recovery remains uneven across sectors, with urban demand still showing signs of weakness, pointed out Suman Chowdhury, executive director and chief economist at Acuite Ratings and Research.
"India’s growth trajectory will hinge on a broader revival in private investment, stable exports, and a stronger urban demand recovery. While the GDP growth in the third quarter of FY2025 underscores resilience, global headwinds are mounting, adding uncertainty to the outlook," said Chowdhury, who still expects GDP to grow 6.4 per cent in the current financial year ending March 2025.
The fourth quarter growth is likely to be closer to 7 per cent, driven by higher government spending, improving consumer sentiments in the backdrop of the exemptions given to the middle class in the Budget, according to him. Other drivers like the Mahakumbh in Prayagraj are also expected to provide an additional boost to the economic activity in the fourth quarter.
Pramod Chowdhary, chief economist at DMI Finance, sees the GDP growth in the current year will be closer to 6.1 per cent and the recovery in the next financial year is also likely to be modest at 6.4 per cent.
"The RBI is expected to cut the repo rate by 25 bps in April, following the rate cut in February. Combined with income tax reductions, these measures are anticipated to support economic recovery and aggregate demand in FY26," said Chowdhary, who also sees downside risks from global trade tensions.
