Tariffs and Investment: The Two Wild Cards for India’s Upward Trend
De Guzman noted that Moody’s baseline forecast already factors in lingering rate uncertainty with the US. If India and the US strike a trade deal that revives exports, GDP could grow faster than expected.
The second big swing factor: private sector investment, which has remained tepid despite strong talk of India’s economic transformation.“If the private sector participates more meaningfully, complementing the government’s infrastructure efforts, India could surprise on the upside,” he said.
However, global risks – including geopolitical tensions and weak global demand – also pose potential downsides.
Domestic demand will be India’s real growth engine
Moody’s expects India’s growth to be largely driven by robust domestic demand, rather than exports. The agency believes India is better insulated than export-heavy Asian economies that bear the brunt of tariff wars. A key tailwind is record-low food inflation, which has sharply improved the purchasing power of rural and low-income households – segments most sensitive to food price fluctuations. Lower inflation, combined with tax reforms that have reduced middle-class debt and recent GST changes, are likely to support consumption in the coming quarters.
Private capex: Improved prospects, but still missing the big jump
Despite favorable macro conditions – favorable inflation, supportive monetary policy and continued public investment – Moody’s says the private sector has not yet become enthusiastic.
While investment activity is taking place, the pace has not accelerated significantly. “We see an accommodative RBI, strong infrastructure build-out and improved connectivity. These will ultimately attract private investments,” De Guzman said.
The next twelve to eighteen months will be critical in determining whether corporate balance sheets will deploy capital more decisively.
Which sectors can surprise? Moody’s points to domestic services
Moody’s believes that export-related sectors may remain under pressure due to US tariff uncertainty, but domestically focused sectors could outperform.Sectors best positioned for upside potential include:
- Consumer services
- Domestic travel and tourism
- Retail and discretionary consumption
- Digital and financial services powered by India’s fast-growing middle class
Private consumption, which makes up the majority of GDP, is expected to remain strong given the favorable inflation cycle and continued government support.
Solid growth, with clear room for upside potential
Moody’s baseline: India will grow 6.5% in 2025 and 2026. But improved US-India trade ties, a revival in private investment and strong consumer spending could push India beyond expectations.
In a global environment full of uncertainty, India’s domestic growth story gives the country a rare tailwind – one that could turn into an upside surprise if the key triggers fall into place.
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