India’s boom, America’s tariffs and the fine print of growth

While strong demand and reforms lift the Indian economy, the chill of global headwinds threatens to stymie its progress.

The fiscal year began with disruption abroad and drama at home. In Washington, President Donald Trump imposed sweeping tariffs on trading partners then reversed course within a week. In Kashmir, following the attack in Pahalgam, India launched Operation Sindoor, aimed at isolating Pakistan and underscoring its military dominance. These shocks set the stage for a turbulent year in which New Delhi found itself simultaneously burnishing its growth story and confronting fresh economic headwinds.

In May, the Reserve Bank of India (RBI) seized the spotlight. It declared itself the world’s most profitable central bank, handing over a record dividend to the government and cutting interest rates in the face of softening inflation. The move signalled that India was prepared to stake its recovery on bold monetary easing, even as the outlook for global trade darkened. Hopes of a breakthrough with America soon faded. Tariffs on Indian exports hardened, while closer ties with Russia and unilateral military moves irritated Washington. Narendra Modi dismissed American involvement in ceasefire efforts, while Trump derided India’s “dead economy” - a line gleefully amplified by opposition parties. Amid such sparring, India’s resilience is now undergoing its sternest test in decades.

Growth surprise

The headline numbers appear encouraging. Real GDP rose by 7.8 percent in the first quarter of fiscal year 2026, the fastest pace in five quarters and well above the earlier projection of 6.7 percent. Nominal GDP grew by 8.8 percent. Growth was fuelled by strong rural demand, a 9.3 percent surge in services, and steady gains in manufacturing and construction. The government’s capital expenditure shot up by 52 percent, while exporters rushed shipments ahead of looming American tariffs. Low inflation boosted real incomes, and reforms such as the Production Linked Incentive (PLI) scheme and Digital India deepened the economy’s foundations.

The result: India has overtaken Japan to become the world’s fourth-largest economy, with nominal GDP of $4.19 trillion. It continues to defy global headwinds, notching 6.2 percent growth in 2025 and forecast to reach close to 6.5 percent in 2026, comfortably above the World Bank’s global estimate of just 2.3 percent. Credit rating agencies have taken note. On August 14th, S&P raised India’s sovereign rating to ‘BBB’ from ‘BBB-’ in its first upgrade in 18 years, citing robust growth, fiscal discipline and restrained inflation. Fitch kept its ‘BBB-’ tag, Moody’s held steady at ‘Baa3’ while DBRS upgraded to ‘BBB’ earlier this year.

Agriculture is proving surprisingly dynamic. The sector grew by 6.5 percent in fiscal year 2025, its best performance in years. Agricultural gross value added is projected to expand between 3 and 3.5 percent this year, building on last year’s 4.6 percent. In the first quarter it contributed 3.7 percent to GDP growth, a slight moderation but still healthy. Ample monsoon rains lifted both kharif and rabi crops, while favourable weather improved soil conditions. Farmers are also adopting technology more widely, supported by government policies on minimum support prices and targeted schemes.

The services sector remains India’s growth engine. It expanded by 9.3 percent in the first quarter, up from 6.8 percent a year earlier, powered by IT outsourcing, trade, transport and public administration. The services PMI in June touched a 14-month high of 61, signalling sustained momentum.

Manufacturing, too, is stirring. Real gross value added rose by 7.7 percent, driven by rising output and record export orders. The manufacturing PMI in June stood at 58.4, while July’s industrial production rose by 3.5 percent year-on-year, lifted by a 5.4 percent jump in manufacturing. Taken together, the numbers suggest resilient domestic demand and growing global appetite for Indian goods.

The expenditure side tells a mixed tale. Private consumption grew by roughly 7 percent year-on-year, led by rural households enjoying stronger farm incomes, lower food prices and tax rebates. Government spending rose nearly 9.7 percent, propelled by capital expenditure that reached 31 percent of the annual target by July. Investments increased by around 7.8 percent, a sign of robust public outlays, steady private participation and higher imports of capital goods.

Trade headwinds

Foreign trade is less reassuring. Exports in the first quarter touched $210.31 billion, buoyed by services and some core merchandise. But imports surged, pushing July’s trade deficit to $27.35 billion—the widest since November 2024. The current-account deficit is expected to widen to between 0.8 and 1.2 percent of GDP. A hefty services surplus of $188.75 billion offers some cushion, but unless export momentum strengthens, the imbalance may persist.

Inflation, meanwhile, has plunged to historic lows. Consumer prices rose just 1.55 percent in July, the weakest since 2017. The RBI now forecasts inflation of 3.7 percent for fiscal 2026. Food inflation turned negative, at minus 1.76 percent, thanks to falling vegetable prices, strong harvests and a benign monsoon.

Yet fiscal pressures are mounting. The central government’s deficit reached Rs. 4.68 lakh crore by July, or nearly 30 percent of the annual target, up from 17.2 percent a year earlier. The spike reflects front-loaded capital expenditure, higher subsidies, welfare payouts and transfers to states, compounded by delayed tax receipts. Even so, the government insists it will meet its 4.4 percent deficit target, banking on buoyant revenues and a slowdown in spending later in the year.

Tariff troubles

The bigger threat comes from abroad. New American tariffs loom over key Indian exports like textiles, gems and jewellery, marine products and auto components. Export earnings from the United States could tumble from $87 billion to $50 billion, potentially trimming half a percentage point off GDP growth. Pharmaceuticals are less vulnerable, given American reliance on Indian generics. Electronics and semiconductors fall under separate regimes. But the broader risk of job losses and shrinking orders is real.

India is hedging its bets abroad and at home. It is wooing 40 trading partners, rushing free-trade deals with Europe, and doubling down on ‘Make in India 2.0,’ PLI subsidies and digital exports, while global tech tie-ups bolster innovation. Yet the Economic Survey warns that to sustain momentum, nominal growth must top 10 percent and real growth hover near 8. The current 7.8 percent looks solid, but with nominal growth at just 8.8 percent, low inflation flatters the numbers. A rise in prices could expose familiar frailties: tepid private investment, regulatory tangles, wobbly non-bank lenders and threadbare infrastructure.

Reform push

The government is keen to press ahead with reforms. Modi’s declaration of a simplified goods and services tax, consolidating into two slabs, aims to cut prices by 4–5 percent, boost consumption by Rs. 1 trillion, ease compliance for small firms and lift GDP growth by 0.4 percent. Combined with trade diversification, a manufacturing push under ‘Atmanirbhar Bharat’ and an emphasis on technology-led growth, these efforts form the backbone of the ‘Viksit Bharat’ vision of a modern, inclusive economy.

India is expected to grow between 6.3 and 6.8 percent in fiscal 2026, powered by strong rural demand, fiscal discipline and reform momentum. Services will continue to lead, manufacturing is gaining traction, and agriculture benefits from record output. Risks abound: trade frictions, climate shocks and a slowing global economy. Yet New Delhi is countering with market expansion, faster technology adoption and new skilling programmes.

For now, India remains a bright spot in a dim global landscape. But beneath the gloss of growth figures lies a delicate balancing act. Tariffs, deficits and structural weaknesses could yet trip up the economy. Achieving the Rs. 5 trillion economy goal is within sight but only if reforms advance as swiftly as the storms gather.

(The author is a Chartered Accountant with a leading company in Mumbai. Views personal)