India economic outlook, May 2025

Besides, the apparent “slowdown” in fiscal 2024 to 2025 has partly been a consequence of election-driven uncertainty (with both India and the United States going to the polls), disruptions driven by more-than-anticipated rainfall till the third quarter, and volatility in global trade networks in the last two quarters. Not to mention, the growth over the year is being compared against a significantly elevated economic base driven by revised figures for the past year.

Deloitte’s forecast for India has been optimistic, compared to market consensus, and GDP data revisions in the past years reinforce confidence in the Indian economy’s inherent strength, which has surpassed optimistic Deloitte projections in the past.⁴ This optimism is carried forward, as we see a good jump in high-frequency indicators such as goods and services tax, auto sales, and sales of fast-moving consumer goods in recent months. Deloitte forecasts annual growth of 6.3% to 6.5% in fiscal 2024 to 2025.

Two opposing forces are set to define India’s economic trajectory in fiscal 2025 to 2026:

• The potential positive impact of tax incentives: The Union Budget’s tax stimulus could raise GDP at least by 0.6% to 0.7% this fiscal (see “Section 1: The Union budget’s strategic tax stimulus to boost economic activity”). Besides, lower inflation, range-bound global oil prices, lower borrowing rates, and more liquidity (due to the easier monetary policy), and a more certain global environment by the end of the year will help boost sentiment. All of these factors will considerably push domestic consumer spending and investments forward.

• The potential negative impact of uncertainty in global trade networks: At the time of writing, India faces an ad valorem baseline tariff rate of 10% on its goods exports to the United States. Since this rate is applicable over and above the 2023 trade-weighted average most-favored nation (MFN) tariff rate of 2.2%, the effective trade-weighted average MFN tariff rate stands at 12.2%.⁵
  The remaining potential differential tariff rate imposed on India, of 16% (for a total reciprocal tariff rate of 26%, which varies across countries and is currently paused for three months), could take the effective trade-weighted average MFN tariff rate to 28.2% on India’s exports to the United States by the end of the fiscal year. This may potentially shave 0.1% to 0.3% off India’s growth (see “Section 2: The potential impact of global trade uncertainty”).

Considering the net impact of these two factors on growth (discussed at length in this edition), Deloitte remains cautiously optimistic about growth in the current fiscal (with likely growth between 6.3% and 6.5%), and forecasts growth between 6.5% and 6.7% in the next (2025 to 2026).

Section 1: The Union budget’s strategic tax stimulus to boost economic activity

One of the biggest highlights of the 2025 Union Budget⁶ was the government’s recognition of the need to bolster consumer spending—particularly among the middle-class demographic—leading to the implementation of a significant personal income tax reduction. Several indicators suggested stress among consumers due to high inflation and economic uncertainty until December 2024, including the observed slowdown in growth in the fast-moving consumer goods sector, in which urban areas saw a modest 2.8% growth in the July to September quarter of 2024, while rural areas experienced a more robust 6% growth.⁷

The tax-exemption announcement for incomes up to INR1.2 million (approximately up to INR1.275 million for salaried individuals), coupled with reduced tax slabs across other income brackets, was targeted at the middle-income class segment, which constitutes 31% of the population and is projected to expand to 38% by 2031.⁸ This will likely inject substantial disposable income into the hands of these consumers (INR630 billion; figure 2), especially among young consumers, who generally have a higher marginal propensity to spend.

In addition, this exemption is aimed at making it far more beneficial for this demographic to move to the “new regime” of income tax.⁹ Consequently, tax savings from investments under Section 80C (exemptions on specific expenditures and investments, available under the “old regime”) will no longer be mandated, leaving more disposable income for consumers to spend or prioritize in the form of other investments (that is, besides those allowed under Section 80C, such as life insurance, equity-linked savings schemes, medical insurance, etc.).

However, this tax stimulus has a downside: It will impact government revenues, constricting its ability to spend. According to the budget, the government will forgo INR1 trillion annually (figure 2)¹⁰ as a direct effect of these income tax exemptions. Nonetheless, higher levels of economic activity are expected to help offset the decline in revenue and help the government adhere to its fiscal deficit target.

The revenue forgone along with reduced investment requirement in the 80C scheme will translate into increased purchasing power for Indian consumers, however, leading to a potential direct boost to consumer spending—worth INR1.6 trillion annually (figure 2).

Besides, a potential boost to the economy through a consumption multiplier (increase in final income driven by new injection of spending) could create economic activity worth between INR6.7 trillion and INR7.9 trillion in the medium term, creating a cycle of economic growth.

The projected economic expansion and immediate impact on consumer spending could translate to an impact of around 0.6% to 0.7% of the nation’s GDP in fiscal year 2025 to 2026.

Section 2: The potential impact of global trade uncertainty

Evolving global trade relations are expected to influence India’s economic trajectory: India’s strong trade relations with the United States, which is also the nation’s largest trading partner,¹¹ will likely impact the nation’s trade balance and economic growth significantly due to the shifting global trade landscape. Given that the trade-weighted average MFN tariff rate imposed on Indian goods imports is among the highest in the world (12%), India is vulnerable to reciprocal tariffs, which are being deliberated currently between the two nations (figure 3).

At the time of writing, India faces an ad valorem baseline tariff rate of 10% on its goods exports to the United States. Since this rate is applicable over and above the 2023 trade-weighted average MFN tariff rate of 2.2%, the effective trade-weighted average MFN tariff rate is 12.2%.¹² After the 90-day pause, the remaining potential differential tariff rate on India of 16% (which varies across countries) could take the effective trade-weighted average MFN tariff rate to 28.2% on India’s exports to the United States by the end of the fiscal year.

The additional 26% total reciprocal tariff rate on India’s exports to the United States is creating uncertainty, and all eyes are on the ongoing negotiations between the two nations. These negotiations may determine the final reciprocal tariff rate, perhaps taking the trade-weighted average MFN tariff rate anywhere between the current 12.2% and the potential 28.2%.

Furthermore, the effective tariff on different commodities will vary. This is important because some products, such as petroleum products, semiconductors, pharmaceuticals, and gold, have been exempted for now. Investigations are underway into some of these products, which could potentially lead to new tariffs, further adding to the uncertainty.

Deloitte assessed the estimated impact of these tariffs on goods exports, imports, and trade balance, considering the net effect of the higher tariffs on trade (using the last eight years’ data, excluding COVID-19 years) and the impact of currency depreciation seen due to uncertainty.

It was noticed that Indian goods exported to the United States are more price-elastic (–0.7, a 1% increase in import tariff rates of the United States leads to a 0.7% fall in India’s exports to the United States). On the other hand, Indian goods imports are less so (–0.08, a 1% increase in India’s import tariff leads to a 0.08% fall in India’s imports from the United States, lower than the impact on exports). This helped in estimating the net impact of tariffs and depreciation. Assuming 3% depreciation across all scenarios helped assess the net impact of changing tariffs only.

For more details on calculation, see “Model to estimate impact of tariff scenarios on Indian exports and imports.”

Three hypotheses have been developed to assess the impact on Indian trade and economy, which are as follows:

Hypothesis 1: There were no changes in tariffs at all.

India’s goods trade surplus was estimated to improve by 10.2%, higher than the 10-year compound annual growth rate of 8% in trade surplus in the past decade (figure 4). 

Hypothesis 3: The two nations negotiate, and India reduces its tariffs on imports from the United States to a minimum.

To cushion the impact, India may consider reducing its own trade-weighted average MFN tariff rate from 12% to 0% and convincing the United States to reduce the differential tariff rates (which will be effective after the announced 90-day period).

• Scenario 1: In the best case, India negotiates with the United States and convinces it not to impose any additional reciprocal tariff rates after 90 days. The effective trade-weighted average MFN tariff rate imposed on Indian exports to the latter remains at 12.2% for the rest of the year.

• Scenario 2: The negotiations result in the United States imposing some reciprocal tariffs, but the effective rate is lowered by the same rate as what India can reduce, which is a maximum of 12%. As a result, the effective trade-weighted average MFN tariff rate imposed on Indian exports to the United States becomes 16.2% (which is 12% below the maximum effective rate of 28.2%) by the end of the fiscal year.

Figure 6 shows the impact on Indian exports to and trade surplus with the United States, For both scenarios. The possibility of products not being exempted has also been considered, giving us a range for the impact. Exports rise marginally, and the impact on India’s trade surplus is likely to be much less than in hypothesis 2.

Overall, India’s total trade deficit is expected to worsen in this fiscal year as its surplus with the United States falls due to higher tariffs imposed by the latter (figure 7). Since a higher trade deficit directly impacts GDP, we expect this impact to range between –0.1% and –0.3% on growth this fiscal year.

India could tap into the US market if it can reach a bilateral trade agreement sooner than other nations, as goods from competitors will likely become relatively more expensive once the pause on tariffs is lifted. Assuming India concludes its agreement before other impacted nations, it stands to gain from increased exports to the United States in sectors such as textiles and electronics, especially as competing countries contend with steeper differential tariff rates (which will theoretically be effective after the 90-day pause). The United States is also a significant importer of Indian electronic goods, including computing machinery and components, and India has seen a rising share of exports in this segment (figure 8).

What lies ahead: Effects of tariffs on economic fundamentals

In our baseline optimistic projections for this quarter (see “Key assumptions for Deloitte’s projections”), we factored in both the possible boost to consumer spending due to tax cuts and the adverse impact of global trade on India’s goods trade balance (as discussed in previous sections).

The tax exemptions announced in the budget will increase consumer spending and may boost GDP by 0.6% to 0.7%. However, uncertainty around the tariff rates imposed by the United States on Indian exports could offset those gains by 0.1% to 0.3%. Deloitte’s outlook remains optimistic, but cautious.

Under the baseline scenario, Deloitte predicts growth in the range of 6.3% to 6.5% in fiscal year 2024 to 2025 and between 6.5% and 6.7% in the current fiscal (figure 9).

Deloitte remains confident that trade uncertainties may settle as India and the United States reach a bilateral trade agreement by fall this year. This would lead to better visibility into global trade for the rest of the year and improve India’s net exports. This, together with India’s strong consumer spending levels and possibly lower inflation, may encourage investors to move on with investment decisions.