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Journalism of Courage
India’s economic outlook could be set for a major shift, with three key developments — the recent S&P credit rating upgrade, a major revamp of the GST structure and changing US trade tariffs — likely to play a crucial role in shaping the country’s growth path, according to HSBC Global Investment Research.
So, are the clouds lifting or merely shifting? Much depends on how India navigates this complex environment. If US tariffs are rolled back, the drag on growth could ease. If GST reforms are implemented with fiscal discipline and fairness across states, the potential growth benefits could be realised, an HSBC report said. And if the broader economic environment remains strong, the foundation of the S&P rating upgrade will remain intact, it said.
S&P Global Ratings recently upgraded India’s sovereign credit rating from BBB- to BBB — the first upgrade in 18 years. This move reflects a growing confidence in India’s economic fundamentals, particularly its fiscal consolidation efforts. Since the pandemic, India has managed to bring its combined fiscal deficit down from 13.4 per cent of GDP to 7.3 per cent by FY26, and has done so while improving the quality of public spending. Inflation has remained relatively contained, and the current account deficit is modest, the HSBC report said.
Based on these improvements, S&P now expects India’s GDP to grow at an average of 6.8 per cent over the next three years and its fiscal deficit to narrow further to 6.6 per cent of GDP by FY29. These projections, if achieved, could lower public debt to below 80 per cent of GDP — a key marker of macroeconomic stability, the report said.
However, sustaining the momentum behind the growth projections partly depends on how India implements its new GST reforms, HSBC said. Announced a day after the ratings upgrade, the proposed overhaul simplifies the four-rate structure into two main slabs — 5 per cent and 18 per cent — along with a special 40 per cent rate for luxury and sin goods, which could boost consumption in sectors like autos, consumer goods, cement and hospitality.
According to HSBC, while this rationalisation is a welcome move for tax compliance and economic efficiency, it comes with a near-term cost. The estimated revenue impact of the GST cuts is around $16 billion (approximately 0.4 per cent of GDP). In line with GST’s cooperative structure, this cost is expected to be shared equally between the Centre and the states.
But here lies the challenge: state governments, unlike the Centre, have limited revenue options and are already bound by strict fiscal deficit norms under the FRBM Act. Without compensation, many states may be unwilling or unable to absorb this revenue loss. If the Centre attempts to offset this by raising GST rates on other goods, it could dilute the efficiency and growth benefits of the reform — precisely the kind of long-term gains that S&P has built into its upgrade rationale, HSBC said.
The third twist in this economic story comes from global geopolitics. The US has decided to impose a 25 per cent tariff on a broad range of Indian exports starting August 27. Around 20 per cent of India’s exports go to the US, and roughly two-thirds of these will be impacted. HSBC estimates suggest that these tariffs could shave 0.3 percentage points off annual GDP growth — or up to 0.7 percentage points if tariffs escalate further. The impact may be especially hard on small and medium businesses in sectors like textiles, jewellery, and processed foods, all of which are labour-intensive. Weakening exports could also hit foreign direct investment and corporate capital expenditure at a time when India is counting on private sector investment to drive the next leg of growth, it said.
There are signs of diplomatic engagement. Following meetings between US President Donald Trump and the presidents of Russia and Ukraine, reports indicate a push for a peace summit, which could ease tensions around sanctions. India’s decision to remove import tariffs on cotton may also help open doors for further trade negotiations with the US.
The HSBC report said that India should seize this moment with a clear and coordinated growth strategy — offering short-term support to exporters, exploring room for monetary easing, and pushing ahead with long-pending structural reforms. These include reducing import tariffs on intermediate goods, fast-tracking trade deals (such as with the EU), and removing domestic bottlenecks through deregulation and labour code implementation.
The decisions taken now will determine whether this triple jolt sets off a chain reaction of sustainable growth — or just momentary shifts in the clouds.
