Dr Rumki Majumdar, Director, Lead of Research & Insights, Deloitte, India

India’s economy is demonstrating resilience following a high-stakes election period. After achieving 8.2% growth in FY2024, GDP expanded by 6.7% year-over-year in the April-June quarter of FY2024-25. Although this marks the slowest pace in five quarters, India continues to rank among the fastest-growing large economies globally. A deep-dive analysis by Dr Rumki Majumdar, Director, Lead of Research & Insights, Deloitte, India points to a rebound in consumer spending growth and recovery in the agriculture sector, both of which are critical for sustained long-term growth for India.

The two methods of estimating economic activity are decoded as follows.

The expenditure approach points to strong private consumption growth, which grew 7.4% in the first quarter from a year earlier—a seven-quarter high. With inflation easing and stronger farm outputs, consumption spending recovered, especially in rural areas. Meanwhile, gross fixed-capital formation spending grew 7.5%, a strong rate despite election uncertainties, modest corporate profits, and substantial income repatriation from foreign capital flows. Exports grew 8.7% in the same period, primarily because of strong services exports. While goods exports did well, exports in certain segments—such as gems and jewelry—contracted and the momentum of higher-value goods remained strong. Imports grew 4.1% in the quarter, down from the 8.3% growth in the prior quarter, resulting in a positive net contribution of trade to GDP.

The production approach points to stronger-than-anticipated manufacturing activities, which grew 7% year over year in the first quarter, and robust construction (10.5%), pushing India’s gross value-added growth to a 6.8% annual rate in the first quarter of fiscal 2024 to 2025, compared with the prior quarter’s 6.3%. After three consecutive quarters of poor growth, agriculture showed signs of recovery, growing at 2%: We believe this recovery will strengthen further as India receives plentiful rainfall this monsoon season. This bodes well for rural demand and growth in overall consumption spending during the festive season.

Short-term growth prospects look promising.

India's outlook remains optimistic, with growth expected to solidify its position as one of the world’s fastest-expanding large economies. Growth is expected to be in the range of 7.0% to 7.3% in FY 2024-25 and 6.5% and 6.8% in the subsequent fiscal year. Five factors will drive growth in the next few quarters— revival in rural consumption, strong capex spending, improved manufacturing, steady oil prices, and a steady US economic outlook.

5. Last but not least, with the US elections concluded and the Federal Reserve already pivoting its monetary policy by cutting policy rates, there are possibilities of higher liquidity, policy stability, and an improved growth outlook in the US. These could boost investments in the US, with a strong likelihood of capital flows outside the borders due to the US’s strong global supply chain linkages. India will likely benefit from these trends and see higher capital inflows translate into long-term investment and job opportunities.

Global risks

There exist risks that could weigh on India’s growth. A slower-than-anticipated global recovery, particularly in Western economies, will likely pressure India’s exports, impacting growth in the upcoming fiscal year. Reduced foreign orders and shifting economic priorities abroad could impact all industries. Additionally, the lingering effects of inflationary pressures and cautious consumer spending in developed economies may soften demand for Indian goods, impacting trade revenue and potentially leading businesses to adjust their export strategies.

Domestically, this moderation in the West could prompt India to diversify its trading partners and prioritise sectors with strong internal demand, such as consumer goods, infrastructure, and renewable energy. Such a shift may also encourage investments to reduce reliance on global demand.

Inflation concerns are subsiding, driven by improved rainfall and proactive government measures that are enhancing the food supply chain. Inflation is expected to moderate further in the second half of the year. However, stronger growth could place upward pressure on inflation if demand outstrips supply. Additionally, if inflation rises in Western economies, it could lead to higher imported inflation. Most likely, inflation will gradually return to the Reserve Bank of India’s target of 4% starting early next year and remain within its acceptable range throughout the forecast period.

Possible implications of the US election results on India?

As the global economy navigates uncertainty, India finds itself at a unique crossroads with

opportunities and challenges that could shape its future growth. The second term of U.S. President-Elect Donald Trump is likely to have a significant impact on global trade dynamics, and India may be poised to capitalize on this changing landscape. Amid fluctuating global trade tensions and shifting economic policies, India could experience what might be termed a "Goldilocks" moment—where the conditions are just right for economic growth, provided the country effectively leverages its strengths and adapts to new opportunities.

Positive:

• Strengthening US-India Relations: With Trump’s focus on trade restrictions with China, India could become a favoured partner and an alternate investment destination in Asia. India is seen as a rising power in Asia and an economic alternative in the region. Long-standing defence, economic security, and technology partnerships with the U.S. may see further growth, drawing investments in tech, defence, pharmaceuticals, and energy.

Figure 1: India is likely to remain the fastest growing in the short-term

Source: *Deloitte Research forecasts, Haver Analytics

1. Rural consumption is bouncing back, driven by easing inflation, particularly in food prices. Additionally, favourable rainfall—marking the third-highest level since 1994—and record-high production and stock of Kharif crops (like rice and paddy sown during the June-August monsoon) signal strong agricultural output this year. These factors are expected to boost rural demand, especially as the festive season approaches and beyond. The government’s reduced capital expenditures during the election will likely be made up for in the latter half of the year, thereby boosting the overall economy.

2. The government’s reduced capital expenditures during the election period are expected to be compensated in the latter half of the year, providing a much-needed economic stimulus. This surge in public spending, especially on infrastructure and development projects, will likely drive job creation, improve economic activity, and enhance demand across various sectors.

• Investment Spillover: While possible tax cuts in the US are aimed at U.S.-based manufacturing, the high US investment could have a spillover effect in India, given the U.S.’s reliance on global supply chains.

• Lower oil prices: Trump's policies, including tariffs, may spur oil production, driving down oil prices. This would benefit oil-importing nations such as India, as import bills would be reduced, and the current account balance may improve.

Challenges:

• Inflation Risks: U.S. inflation due to higher tariffs and fiscal deficit could pass through to India.

• Slower capital flows: If the US Fed maintains tighter monetary policies than anticipated, it could impact global liquidity and reduce capital inflows to emerging markets, including India.

Figure 2: Capex spending has been rising thanks to government spending, but lately, corporate spending is also pacing up

Source: ICICI Research

3. Manufacturing sector capacity utilization is at an all-time high of 76.4%, which suggests that businesses will have to ramp up private investments to cater to rising demand. Besides, higher government spending will lead to better efficiencies and will crowd in private investments.

4. Oil prices are anticipated to remain relatively stable and within a moderate range, providing much-needed relief for India’s import bills and contributing to a reduction in the current account deficit. The sustained low prices will also lower the cost of imported raw materials and intermediate goods, leading to a decrease in production costs across various industries. This will not only enhance the competitiveness of Indian businesses but also offer consumers some respite from rising prices.

• Exchange rate risks: Additionally, U.S. dollar depreciation due to higher deficits and debt caused by lower US taxes could affect India’s export competitiveness.

In summary, while India stands to benefit strategically in a few areas, such as trade diversification and foreign investments, navigating this advantage will demand a keen understanding of shifting global dynamics. A well-calibrated approach will be crucial, enabling India to capitalise on emerging benefits from the changing government in the US while mitigating potential risks from geopolitical and economic shifts.

The views expressed are those of the author and do not represent the views of her organization.