India’s growth stays strong, but focusing inward key amid global risks

Private consumption picked up last fiscal year after trailing GDP growth for two years.

India’s GDP grew at a pace of 7.4% in the fourth quarter of fiscal 2025, even as retail inflation remained low at 3.7%. While these are positive numbers, we are far from out of the woods. For one, US tariffs loom on the horizon, and for another, global uncertainties are plentiful. This calls for strengthening the domestic drivers of growth.

In response, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) stepped up its support for growth on Friday by delivering a larger-than-expected repo rate cut and a significant reduction in the cash reserve ratio, which will boost systemic liquidity.

These measures will play an important role in maintaining India’s GDP growth at 6.5% this fiscal year, even though the downside risks to growth remain due to the tariff disputes and global uncertainties.

However, there is a warning against complacency.

Last fiscal year, India’s GDP growth settled at 6.5% after a strong 9.2% growth in fiscal 2024, as the impact of stimuli initiated during the Covid-19 pandemic moderated. This is a nudge below the pre-pandemic decadal growth rate of 6.6%.

This fiscal, the ongoing tariff disputes and geopolitical headwinds could hamper growth momentum.

Thus, enhancing the durability of growth must be the policy priority for both the RBI and the government.

With limited fiscal space to push up growth and with the RBI’s eye peeled on inflation control, there are two main strategies that can ensure durable growth over the next two to three fiscals.

First is by promoting a better balance in consumption.

Second is by aligning the overall GDP growth more evenly between consumption and investment by strengthening them both.

To be sure, private consumption picked up last fiscal year after trailing GDP growth for two years. A favourable monsoon was a crucial enabler. A healthy agricultural year, particularly benefiting rural areas, helped. Meanwhile, urban areas benefited from lower inflation, though demand was subdued due to elevated borrowing costs.

This fiscal year, prospects remain bright for rural areas, with the Indian Meteorological Department forecasting a second consecutive year of above-normal monsoons. This implies another year of healthy agricultural incomes and easing inflation.

The positive aspect is that rate cuts by the MPC are expected to lift urban consumer sentiment. The purchasing power of urban consumers is also expected to benefit from income tax relief and lower inflation. However, external headwinds could dampen demand in sectors reliant on exports.

Therefore, beyond the short-term boosters, a durable improvement in consumption will require additional factors that raise the income prospects of the masses.

The majority of India’s workforce is employed in agriculture (46% as of 2023-24 according to the Periodic Labour Force Survey), and their livelihoods are closely tied to weather vagaries.

To enable the transition of the workforce from agriculture to non-agriculture, we need stronger economic growth in the non-agricultural sectors.

While agricultural GDP growth improved last fiscal year, the non-agricultural sector showed signs of slowing.

Returning to the topic of US tariffs, the effective tariff rate on India’s exports is expected to be higher than last year. Consequently, merchandise exports are likely to suffer the most, and private corporate investment could experience delays due to looming uncertainties.

Once again, the non-agricultural sector seems more vulnerable to these risks.

Investors are also concerned about the reactions of other economies. Corporate India is wary of the potential dumping of goods by China. Chinese manufacturing, which already had large excess capacity, is particularly at risk from restrictive trade measures by the US.

In India, private corporate investments have been sluggish. In fiscal 2024, they grew by a mere 0.5%, while government investment increased by 25.6%. Given the fiscal consolidation targets, government capital expenditure (capex) growth is expected to be moderate going forward.

Net-net, while the MPC’s rate cuts are welcome, they are not enough.

Lower interest rates will provide some relief to business conditions. Improved consumption will also push up capacity utilisation rates. Both of these should support economic activity and provide a cushion against external shocks.

However, for a material pick-up in growth and its sustainability beyond this fiscal year, a steady revival in consumption and private sector investments is critical.

The MPC is right to frontload the repo rate cuts this fiscal year, as they take time to transmit to market interest rates. Moreover, bank credit growth has shown signs of slackening in the first two months of this fiscal year. Lower interest rates will help stimulate credit demand in the economy.

Countries are gravitating towards protectionism, and US tariffs will only push them further in that direction. This could impact global growth in the years to come.

The two largest economies in the world have become trade adversaries, and the repercussions of this will be felt in global trade flows. As a result, countries are looking to strengthen their domestic drivers in an environment of shifting global risks.

So far, global shocks have not derailed India’s growth story. We continued to be the fastest-growing large economy last year, powered by domestic consumption and investments.

Fiscal policy has been a major driver of this by boosting investments. In the current fiscal year, the MPC’s rate cuts will help consumption contribute more to growth.

But over the medium term, a structural improvement in the economy is needed to keep growth resilient.

A broad-based improvement in private sector investments is critical to raising the economy’s potential.

A mix of conducive financial conditions, structural reforms, and an agile policy approach is necessary to stoke and sustain domestic animal spirits in a turbulent world.