A weak manufacturing sector, a slowdown in growth, lower corporate earnings led by a weak consumption have led to a slowdown in the Indian economy. Investors who enjoyed over 20% returns each year for over 4 years until September 2024 are seeing red in their one-year returns. A look at the 5-year returns, however, continues to look impressive.
Capital outflows from India (particularly in the equity segment) have been driven by steadily climbing yields on the US 10-year Treasury bonds, increasing from an average of 3.72% in September 2024 to 4.45% in February 2025. A significant slowdown in manufacturing is primarily led by rising costs, weak demand, limited access to credit and the influx of cheaper Chinese imports. With MSME’s constituting over 40% of this sector, we expect to see some revival in the sector during the month of March 2025.
India’s tariffs (9.45%) on the US are considerably higher than those imposed on the US by Malaysia (1.84%), Vietnam (2.85%) and China (7.13%), which could lead to further reciprocal tariffs being imposed by the US starting April 2025. Moreover, higher tariffs by the US on imports from China could lead to Chinese commodities being diverted to other countries, including India, thus impacting the focus on ‘Make in India’. While cheaper input could benefit Indian manufacturers, those competing with cheaper imports of intermediate and finished goods could see an adverse impact on their sales and margins. Overall, expectations are rife around a slowdown in the US and China, but the Eurozone and the United Kingdom are expected to witness growth.
A low Current Account Deficit, healthy economic growth led by domestic investments, low external public debt, and adequate forex reserves are a few factors that act as safe harbors for India’s economy. We expect India to maintain a steady growth rate, albeit at a lower rate owing to factors like a lower food inflation, higher private consumption owing to tax benefits announced in the 2025-26 budget, lower borrowing and government welfare spending. The HSBC India PMI (Purchasing Manager’s Index) continues to remain above 50, indicating that economic expansion remains better in comparison to other countries. A look at the world data, indicates that India will remain amongst the fastest growing economies in the world.
Private consumption is expected to recover owing to multiple reasons. Lowering of taxation, expectations of healthy agricultural production and cooling food inflation should be able to create space in household budgets for higher discretionary spending.
India’s vulnerability is well covered by a robust forex cover and a high growth rate. The focus on ease of doing business and the promotion of domestic growth drivers have been playing a key role in fueling India’s growth engine forward. Real estate and Infrastructural growth play a pivotal role in the growth of the economy. We think that an uptick in private corporate investment is an important driver to promote competitiveness and drive innovation, thus unlocking India’s long-term growth potential.
We expect corporate investments to increase gradually as the government has taken steps to address domestic demand and ease conditions for the private sector to invest, amid heightened global uncertainty. MPC’s rate cut in February 2025, owing to the easing of the CPI Inflation is likely to open doors for further cuts, thus creating a conducive environment for monetary easing. RBI’s open market operations worth INR 1 lakh crore in March 2025 are aimed at infusing liquidity and promoting sustainable growth.
We think that ensuring a durable increase in employment opportunities, upskilling the workforce and creating permanent income opportunities for low-income households will prove to be a game changer for the India growth story over the long term. Overall, we think that India will continue to grow, albeit at a slower rate as compared to last year, because of overall lower fiscal impulse.
