India’s Growth Supported by Domestic Demand Despite Potential Tariff Threats, According to Moody’s
Moody’s Assessment: India’s Resilience Against US Tariffs
According to Moody’s report, India is in a favorable position to endure US tariffs, supported by strong domestic demand, limited trade reliance, and a vigorous services sector. Projections indicate a slight decline in growth to 6.3% in 2025, although this figure is expected to be the highest among G-20 nations. The government’s focus on infrastructure development, tax reductions, and dropping inflation rates will play a crucial role in sustaining economic momentum.
Moody’s emphasized that India is better equipped than numerous other emerging markets to navigate challenges posed by US tariffs and global trade uncertainties. This ability is bolstered by solid internal growth catalysts, a considerable domestic market, and a minimal dependency on international goods trade. Under the reciprocal tariff scheme, India encountered an extra 26% tariff on goods exported to the US. However, on April 9, the US administration announced a temporary 90-day suspension of most tariffs, returning to a general rate of 10% applicable to nearly all targeted nations. The immediate trade ramifications for India appear limited. Despite the US being the largest export market for Indian products, the concessions from the tariff pause and the relatively smaller share of goods exports in GDP—compared to other Asia-Pacific emerging markets—diminish the impact on India’s growth, according to Moody’s.
Moody’s projected that while 10% general tariffs alongside 30% tariffs on numerous Chinese goods exported to the US may hamper global growth, they might lead to a slight reduction in India’s economic growth forecast for the calendar year 2025, decreasing from 6.7% to 6.3%. Nevertheless, this expected growth still surpasses that of other G-20 economies. The government’s efforts to enhance private consumer spending, expand manufacturing capabilities, and escalate infrastructure investment are anticipated to counterbalance the deteriorating outlook for global demand.
The government has set a capital expenditure (capex) target of ₹11.2 lakh crore for FY26, compared to a revised capex estimate of ₹10.18 lakh crore for FY25. Furthermore, the reduction in inflation offers a possibility for interest rate cuts, providing additional support to the economy, even as favorable liquidity within the banking sector aids lending activities. Tensions with Pakistan, particularly a recent escalation in May, are expected to have a more significant negative impact on Pakistan’s economic growth than that of India.
In the FY26 budget, the government significantly increased the income tax exemption limit from ₹7 lakh to ₹12 lakh in the new tax regime, projecting that this change would leave taxpayers with about ₹1 lakh crore more in their wallets. This increase is likely to stimulate consumption and demand throughout the economy. India’s low dependence on goods trade and its dynamic service industry serve as buffers against US tariffs. Additionally, Moody’s noted that products manufactured in India could potentially see increased demand from the US if trade negotiations culminate in lower tariffs compared to other emerging markets.
Despite global economic fluctuations, India’s solid banking system and stable credit conditions emphasize the country’s economic robustness. However, any deterioration in global financial and economic conditions could have cascading effects. The continued strong demand for sectors such as power, transportation, and digital infrastructure is anticipated to draw substantial capital investments over the next five to seven years. Additionally, the impact of US tariffs is expected to be minimal for most infrastructure subsectors, as they primarily serve domestic needs and benefit from favorable regulatory and contractual frameworks.
