India's economic recovery likely clouded by global trade risks ahead

By Ruchi Bhatia

 

India’s economy likely rebounded last quarter, although growth prospects remain uncertain in coming months as US President Donald Trump threatens to upend global trade with tariffs.  

 

Data due Friday will likely show gross domestic product grew 6.2 per cent in the three months to December, according to a median estimate of economists surveyed by Bloomberg. While that’s higher than a seven-quarter low of 5.4 per cent in the July-September period, it falls short of the central bank’s projection of 6.8 per cent. 

 

The Indian government has already lowered its GDP growth estimate for the current fiscal year through March to 6.4 per cent — the weakest pace since the pandemic — with economists expecting another downward revision on Friday. Growth is projected by the government to be below 7 per cent in the coming fiscal year as well, compared with 8 per cent expansion in the previous year.  

 

While India is still the fastest-expanding major economy, growth is still well below the 8 per cent pace economists say is required for Prime Minister Narendra Modi to fulfill his bold pledge of converting the country into a developed nation by 2047. 

 

Last quarter’s growth was likely boosted by a pick-up in government spending and strong rural consumption. However, with India being among the nations most exposed to Trump’s reciprocal tariffs, the outlook remains unclear.

 

“Weak net exports and slow urban consumption is going to weigh on headline GDP growth,” said Sonal Varma, chief economist for India at Nomura Singapore Ltd., forecasting a 5.8 per cent expansion for the quarter. 

 

Next year, trade disruptions will be a major headwind, she said, indicating that “there needs to be a bigger policy focus on boosting domestic demand, because external growth drivers may not be available to tap.”

 

Government Spending 

After a slowdown during the elections, the government sped up spending on infrastructure in the final three months of 2024. Official data showed the government spent Rs 2.7 trillion on roads, ports and highways in the quarter. It used 61.7 per cent of its budgeted capital spending in the first nine months of the financial year, compared to 37.7 per cent until September.

 

Rural consumption also likely improved during the festive season of Diwali, with farmers benefiting from surplus rains and a bumper harvest.

 

To stimulate the economy further, the finance minister announced record tax cuts of Rs 1 trillion in the federal budget earlier this month, just days before the central bank reduced interest rates for the first time in almost five years. Central bank policymakers expressed concern that economic growth would be damaged by excessively restrictive monetary policy. 

 

Most economists in a Bloomberg survey forecast the Reserve Bank of India will lower rates by another 50 basis points in 2025 to shore up demand. The RBI is also in the process of injecting more than $25 billion through liquidity measures to tackle a cash crunch in the banking system.

 

While growth indicators point to clear improvement in December, data trickling in for January shows some softness, led by trade and transport, according to HSBC Holdings Plc.

 

“The message is clear: even as December GDP looks stronger, support from RBI rate cuts and liquidity may have to continue,” Pranjul Bhandari, an economist at HSBC, wrote in a note.