India’s domestic demand recovery coupled with services exports will drive growth

Though India may face higher risks from reciprocal tariffs due to its higher tariff differentials with the US, its relatively low dependence on exports as a growth driver could make the economy more resilient in a global trade slowdown, according to analysts.

Over the past few years, India’s services exports have grown significantly and are now almost on a par with goods exports in terms of annual values. In addition, with a vast domestic market, like jewellery, textiles etc, and supportive fiscal and monetary policy settings, India will likely pivot into domestic consumption-driven growth in the coming quarters.

In the latest budget, the Indian government announced a significant tax cut for low- and middle-income households, which could be a marginal boost to consumption given their relatively higher propensity to consume. Easing inflation, especially food prices, may also help with consumption, leaving India stronger to face the future.

Meanwhile, a steep rebound of growth momentum is not expected shortly, given the softening of public capital expenditure over the last few quarters as fiscal policy turned more prudent. Private sector investments might pick up and might further accelerate should the Reserve Bank of India lower the policy rate further, according to analysts’ opinion.