Growth in India has slowed in a way that has caught many by surprise, slipping to 5.4 per cent in the September quarter of 2024. ANZ Research expects growth to rebound, but not significantly.
For the fiscal year 2025/26, ANZ Research expects India’s growth could be in the ballpark of 6.5 per cent, much lower than the last few years.
Calls to boost growth from the policy perspective have been loud, and February’s Union Budget came with a huge wish list. However, the broader message from India's budget was one of fiscal prudence.
The government stuck to its consolidation path in the budget, cutting the deficit ratio to 4.4 per cent of gross domestic product by fiscal 2026. This is important recognition that public debt is a huge burden on the economy. The deficit and debt ratios are quite high and need to be brought down to create space for the private sector.
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At the same time, the budget aims to stimulate India’s economy in very specific ways. Income tax relief for the middle class could boost consumption by about 10 to 15 basis points of GDP.
This may not be substantial enough to propel growth on a higher trajectory, but is important from a public finance perspective, given tax compliance has been increasing with a goal to bring the per-capita tax burden lower.
Onus
The onus therefore shifts to the monetary policy. The Reserve Bank of India (RBI) has made a good start on this front by cutting the policy repurchasing (repo) rate by 25 five basis points, despite the exchange-rate pressures seen in recent months.
Easing food and vegetable prices have loosened the food-inflation constraint, and the RBI remains confident that, at least by the third quarter of 2025, India's inflation will align with its 4 per cent target. The 25 basis-point cut makes monetary policy less restrictive for growth, and that’s a step in a good direction.
The depth of the rate-cutting cycle will depend on several factors. Exchange-rate movements will be critical. Global markets are volatile and strength in the United States’ dollar could eventually limit the extent of cuts the RBI can deliver to support growth.
ANZ Research expects two more rate cuts, taking the repo rate to 5.75 per cent by June 2025. The risks are two sided.
If growth surprises on the downside and exchange rate does not weaken, more cut could be in order. If the US dollar strengthens substantially, limiting the freedom of the Reserve Bank of India, fewer than two cuts could occur.
Discussions
All of this is occurring as the Trump administration in the US is placing tariffs on other economies. There is talk India could be swept up in the policy, which could hurt the economy’s outlook.
India currently faces tariffs of about 3 per cent when trading into the US, but charges about 9.5 per cent to 10 per cent on imports. Any reciprocal tariff would be damaging.
Given India has become more dependent on trade for growth than it was before the pandemic period, particularly from the US, this poses a significant downside risk to India’s outlook going forward. How significant is hard to quantify.
Dhiraj Nim is an economist at ANZ Research
