Opinion Lower taxes spur buying, but jobs and incomes will have to grow

The big saviour for India is its services exports, which have been recording healthy growth, even in midst of all the global turmoil.

There is likely to be some moderation in growth in the second half of the year as India’s exports feel the pinch of high US tariffs

Rajani Sinha

November 13, 2025 07:27 AM IST First published on: Nov 13, 2025 at 07:27 AM IST

The Indian economy is going through a challenging phase. On the external front, it has been pushed into a corner with one of the highest reciprocal tariffs imposed by the US. The government, on its part, has been trying to push up domestic demand through lower income tax and GST rates. There are other supporting factors, too, like benign inflation and a good monsoon, that are expected to keep overall domestic consumption healthy. The IMF has recently revised India’s GDP growth projection for 2025-26 upwards to 6.6 per cent (the earlier projection was 6.4 per cent), even as it downgraded the growth for 2026-27 to 6.2 per cent (earlier at 6.4 per cent). The critical question at this point is that once the festive demand tapers, will the economy be able to maintain the growth momentum in the midst of global threats?

A good monsoon and the increase in the minimum support price for rabi and kharif crops have supported rural sentiment. Indicators such as robust tractor sales, a pick-up in two-wheeler sales, a revival in government spending on agriculture and allied sectors, and a strong uptick in agricultural exports point to healthy growth in the farm sector in the second quarter of this year. The manufacturing sector also demonstrated good performance, as reflected in improvement in indicators such as steel production, the Index of Industrial Production (IIP) for manufacturing, and non-petroleum, non-agricultural exports. The service sector’s performance remains mixed. While indicators such as e-way bill generation and toll revenues improved, others such as air passenger traffic and services exports showed moderation.

India’s goods exports have seen strong growth, largely due to front-loading ahead of the tariff implementation. In the first half of the year, India’s non-oil goods exports grew by 7 per cent, compared to 4.6 per cent in the corresponding period of the previous year. Electronics exports that contribute around 10 per cent to India’s good exports have grown by a robust 40 per cent in the period under review and that has supported the overall exports momentum. However, in the months to come, items like gems and jewellery, textile, ready-made garments, seafood, leather and footwear will feel the adverse impact of high US tariffs. In September, as the high tariffs became effective, India’s goods exports to the US fell by 12 per cent, with contraction in exports of all major items except electronics goods, which continued to record high growth.

The big saviour for India is its services exports, which have been recording healthy growth, even in midst of all the global turmoil. Services exports have grown by a CAGR of 10 per cent between FY18 and FY25, while goods exports in the same period grew by 5 per cent. In the first half of the year, exports remained healthy, growing by around 10 per cent. Even with the lingering global threats, we expect India’s current account deficit to remain comfortable at around 1 per cent of GDP in FY26. Apart from healthy services exports, the current account will be supported by remittances and benign global crude oil prices. Capital flows have been adversely impacted by persistent FII outflows from the equity market and feeble net FDI flows. Capital flows are likely to remain volatile in midst of the global uncertainties. However, India’s high forex reserve of around $690 billion remains a comforting factor.

With external demand remaining vulnerable, the government’s focus is on increasing domestic demand. The recent rationalisation of GST rates, reduction in income tax burden, the good monsoon, benign inflation and lower interest rates are supportive factors for domestic demand. This is being reflected in strong festive demand this year, and hence consumer spending is likely to have recorded good growth in the first half of the year. As far as investment expenditure is concerned, the Centre’s capital expenditure surged by 40 per cent during the period. While there has been a sharp jump in disbursement towards the Department of Food and Public Distribution, even after adjusting for this disbursement, the Centre’s capex has risen by a healthy 29 per cent. As per our analysis, private sector investment is also seeing a pickup led by the power, cement, construction, pharmaceuticals and logistics sectors.

With the recent high frequency indicators looking good, we are projecting the economy to grow at 7.2 per cent in the second quarter, following 7.8 per cent in the first quarter. However, there is likely to be some moderation in growth in the second half of the year as India’s exports feel the pinch of high US tariffs. Moreover, central government expenditure could also slow down as it remains committed to fiscal consolidation. We expect GDP growth to moderate to around 6.3 per cent in the second half, taking the full-year growth to around 6.9 per cent. It is to be noted that some of the increase in India’s real GDP growth is because of the statistical impact of the low deflator this year.

We are observing a gradual easing of inflationary pressures. Supported by strong agricultural production and recent GST rate reductions, inflation in the second half is projected to average around 2 per cent, lower than 2.2 per cent in the first half. This moderation in price pressure provides the RBI with greater flexibility to implement rate cuts should economic growth soften amid external headwinds.

The Indian economy is better placed in midst of the global turmoil. Factors like GST rate rationalisation, lower inflation and the good monsoon are supportive of domestic demand, even while the external scenario remains uncertain. As the global environment is likely to remain volatile, it will be critical to ensure that domestic demand momentum is sustained. While impetuses like a lower tax burden will provide a boost to consumption, for longer-term growth momentum, it will be critical for household income to grow. Lower wage growth and weak hiring by the IT sector in the last couple of years is depressing household income in urban areas. The impact of reciprocal tariffs on the labour-intensive export sector will further dent household income. Structural reforms to ensure increased private investment and job creation in the economy will help sustain healthy growth over a longer period.

The writer is chief economist, CAREEdge Ratings