Global Challenges:
- Uncertainty due to Trump 2.0 policies, including tariffs and China’s fiscal stimulus.
- Global GDP growth expected to slow to 2.9% year-on-year in 2025, reducing India’s reliance on exports and domestic demand.
- Expected rebound to 6.57.0% over coming quarters, supported by higher government spending and rural recovery.
India’s Post-Pandemic Rebound:
- Driven by pent-up demand, surge in retail credit, and strong exports performance.
- Urban consumption would likely soften as pent-up demand post-pandemic dissipates, monetary policy remains tight, and nominal income growth slows.
- Reserve Bank of India’s macroprudential tightening has already cramped credit growth, and loan defaults have increased for credit card and personal loans.
- The banks are likely to turn risk averse, and credit demand for small-ticket consumer goods is likely to soften.
China Overcapacity Threat
- China’s overcapacity in response to Western tariffs, which most likely shifts the exports to newer markets, such as India.
- Import pressure from China cuts across low-tech, intermediate, and high-tech goods.
- An uncertain international environment, softer domestic demand, higher credit costs, and a rising trend of imports from China would likely put pressure on private capex.
Positive Offsets
- Rural demand will benefit from strong monsoons, the government will accelerate capital expenditure, services exports are rising, and India will benefit from trade diversion.
- GDP growth to ease to 5.8% y-o-y in 2025 from 6.5% in 2024.
Inflation:
- Global and domestic background makes for less demand-side or commodity inflation.
- The prime risks to inflation are from currency depreciation and surprise food price shocks due to bad weather.
Currency Depreciation Risks:
- Merchandise exports are likely to face headwinds from aslowing global economy, but a strong services trade surplus, healthy remittances, and stable oil prices should keep the current account deficit manageable at around 1.5% of GDP.
