Indian Economy Amid Global Trade War
The Indian economy, with its relatively low exposure to external trade, is somewhat insulated from the global trade war's direct impacts. However, it cannot completely avoid the broader global uncertainties that may arise.
Economic Growth Trends and Challenges
- India's GDP growth is projected to moderate to 6.5% in FY25, down from an average of 8.4% over the previous two years.
- The slowdown is partially due to a pause in government investment, influenced by the election cycle, and weak private investment.
- Urban consumption has dwindled, though rural consumption shows improvement.
- GDP growth is anticipated to rebound in Q4 FY25, driven by government investment and the Maha Kumbh event.
Factors Supporting Economic Recovery
- Reduction in income tax and lower inflation are expected to boost consumer spending in FY26.
- Continued rural demand growth is contingent on a normal monsoon.
- Lower interest rates are another supportive factor.
Global Trade War Impact
- Direct impact of higher tariffs on India is limited, with goods exports to the US accounting for only 2% of India’s GDP.
- Indirect impacts could be severe, affecting overall exports and services exports, particularly in IT and IT-enabled sectors.
Inflation Dynamics
- Consumer Price Index inflation reduced to 3.3% in March 2025, from 6.2% in October 2024.
- Global crude oil prices have fallen by approximately 15% from last year and are expected to remain stable.
- Potential risks include supply bottlenecks due to geopolitical conflicts and weather-related disruptions affecting food inflation.
Monetary Policy Outlook
- The Reserve Bank of India (RBI) may cut rates further by 50 basis points in FY26.
- The US Federal Reserve's actions, particularly if they prioritize growth concerns and continue rate cuts, could influence the RBI's decisions.