Indian economy likely grew solidly before Trump tariffs hit outlook

By Anup Roy

 

India’s economy likely grew at a healthy clip in the June quarter amid optimism over a trade deal with Washington, although the outlook has since darkened as the country comes under the highest US tariffs in Asia.

 

India’s gross domestic product probably expanded 6.7 per cent in the three months to June, the first quarter of the financial year, according to the median estimate in a Bloomberg survey of 37 economists. That’s slower than the 7.4 per cent expansion in the January–March period, but stronger than 6.5 per cent a year earlier. Growth in the first quarter of the fiscal year is typically softer following a busy year-end. 

 

Exporters rushed shipments to the US after President Donald Trump temporarily paused his reciprocal tariffs, helping prop up the quarter. The early onset of monsoons spurred sowing and boosted rural demand, lifting the economy. Still, the gains may prove fleeting, with growth expected to soften next quarter as businesses face fresh US tariffs.

 

“We’ve seen significant front-loading on the export side,” said Sonal Varma, economist at Nomura Holdings Inc., in an interview with Bloomberg Television Wednesday, adding that other segments of the economy like urban consumption and private capital expenditure remain weak. 

 

Friday’s data may show weak mining, power demand and slower manufacturing as auto sales slump, according to Bank of America economists Rahul Bajoria and Smriti Mehra. They also flagged a likely gap between GDP and gross value added, another measure of economic performance, as lower subsidies and higher taxes weigh on the latter.

 

Varma estimates GDP at about 6.9 per cent for the April–June quarter, although she expects growth to slow sharply to below 6 per cent in the second half of the fiscal year starting October.  

 

The downshift comes as India grapples with 50 per cent US tariffs that took effect this week, which threaten to hit industries such as textiles, footwear and jewelry and pose a 0.6–0.8 percentage point drag on annual growth, according to Citigroup Inc. estimates. 

 

Growth faces “headwinds” from US tariffs and weaker global demand, which will pressure India’s export and labor-intensive sectors, said Indranil Pan, chief economist at Yes Bank Ltd.  

 

Still, there is hope that growth could get a “push” from some of the changes the Narendra Modi government has announced recently to spur demand, he added. 

 

India’s economy is largely driven by domestic demand, rather than exports, so shoring up consumer and business sentiment is key to faster growth. Private consumption makes up about 60 per cent of India’s GDP — and although the US is India’s biggest export market, with shipments of $87.4 billion in 2024, that still amounts to only 2 per cent of India’s total GDP.  

 

To boost demand and cushion the blow from the US tariffs, the government has announced plans to streamline the country’s complex Goods and Services tax, which is expected to spur a reduction in prices, bringing relief for consumers and small businesses. IDFC First Bank estimates the tax cut could lift the nominal GDP growth by 0.6 percentage points over 12 months.

 

Monetary easing by the Reserve Bank of India, which has lowered interest rates by 100 basis points since February, is also expected to support growth, analysts said. 

 

“Outside monetary support, the need of the hour is also more targeted export support at this stage,” Varma said. “The full impact of the tariffs, in our view, will be visible after September.”