India's Growth Slowdown Projected Yet Remains Strongest Among Majors - Near-Term Trajectory and Sustaining Growth Drivers

India's economy faces a moderation in momentum, with GDP growth projected at 6.4–6.6% for fiscal 2024/25. This follows a strong 8.2% expansion in 2023/24, now cooling amid sectoral divergence. Manufacturing and construction activity remain subdued, though services and agriculture have partially offset these weaknesses to sustain growth.

Looking ahead, growth is expected to stabilize around 6.5% in fiscal 2026 according to analysis. Favorable monsoons, persistently low oil prices, and reduced interest rates provide near-term support. Services exports-now 47% of total exports-have been a key resilience factor amid global trade uncertainties.

However, risks warrant caution. High real interest rates and currency volatility could weigh on private investment, while external pressures like U.S. tariff threats and declining capital inflows may undermine export competitiveness. Policy actions, including inflation control and tax measures, aim to mitigate these headwinds, but global trade tensions and China's industrial overcapacity remain threats to sustained momentum.

Sustaining Growth: Drivers and Durability

India's near-term economic momentum rests on several policy supports, including recent tax cuts and GST reforms, alongside accommodative monetary policy and possible US trade agreements. Deloitte projects GDP growth between 6.5% and 6.9% for the next two fiscal years, underpinned by strong domestic demand and accelerated government spending.

However, this positive trajectory faces headwinds. US tariff threats could pressure export-dependent industries, while productivity lags remain a structural concern. Small and medium enterprises (SMEs) currently operate at just 18% of the efficiency levels seen in larger firms, potentially constraining their ability to compete globally. Integration into global value chains remains limited, further complicating export expansion.

These challenges necessitate careful navigation. Credit constraints and intense market competition continue to weigh on business expansion, particularly for SMEs. While policy measures provide support, they are not a panacea for deep-seated inefficiencies. The outlook hinges on whether productivity gaps can narrow and export sectors can adapt to evolving trade dynamics without external disruptions.

External Headwinds and Domestic Vulnerabilities

India's growth momentum faces mounting headwinds from both global and domestic fronts. The specter of U.S. tariff escalation looms large, with Deloitte flagging potential export competitiveness losses amid stalled India-U.S. trade negotiations. This comes alongside declining foreign direct investment and capital outflows, which threaten fiscal resilience as the Reserve Bank of India prioritizes growth over currency stabilization according to research.

Domestically, subdued private investment remains a structural brake. Despite policy interventions like tax cuts and GST reforms, manufacturing and construction activity underperformed in FY2024/25, with MSME productivity lagging far behind large enterprises (only 18% of their efficiency levels). Compounding this, persistently high real interest rates-maintained even as oil prices fell-continue to suppress business borrowing and expansion plans.

While favorable monsoons and services exports (47% of total) provide some buffer, the convergence of these risks demands vigilance. A slowing U.S. economy-projected to grow just 1.7% in 2025-and China's industrial overcapacity further amplify the vulnerability of India's export-dependent sectors. Without accelerated reforms to boost manufacturing productivity and global value chain integration, these challenges could erode the gains achieved through recent fiscal stimulus.