India: Fiscal policy to support growth

Despite robust growth between April and June 2025 (probably overestimated), the government is stepping up measures to support the Indian economy.

The “Goods and Services Tax Council”, which is due to meet on 3 and 4 September, is expected to approve a cut in VAT rates. This measure would counteract the effects of the increase in US tariffs without weakening the central government's finances.

Strong GDP growth

Real GDP growth reached 7.8% year-on-year (y/y) in the first quarter of the Fiscal year 2025/2026 (April-June 2025). This is one of the highest rates of growth among emerging Asian countries, along with Vietnam (+8% y/y over the same period). However, the reality is more nuanced, as the very low GDP deflator (+0.9% y/y) has increased real growth. This effect is unlikely to last.

Activity has been sustained by the dynamism of rural household consumption and the sharp rise in public spending. Urban household consumption remained sluggish, as illustrated by the low level of car sales, VAT receipts and air traffic. Investment slowed. Although exports remained robust, the contribution of net exports to GDP growth was negative due to the rise in imports in conjunction with the sharp increase in inventories. The services sector recorded the strongest growth (+9.3% y/y), while activity in the mining industry contracted.

Risks for exports and private investment

GDP growth is expected to slow sharply over the next few quarters. The Indian economy remains mainly driven by domestic demand, but it could be penalised by the tightening of US trade policy in the short, medium and long term. If the Trump administration were to maintain US customs duties on Indian products at much higher levels than in other Asian countries (the effective rate has been raised from 2.4% at the end of 2024 to 36.2% today, compared with 19.3% in Vietnam), this would weigh on growth (-0.6pp over a full year).

The United States is India's leading export trading partner (18.3% of its goods exports in 2024) and its leading investor (excluding Singapore and Mauritius, through which international financial flows pass). The sectors most vulnerable to a rise in US customs duties would be the most labour-intensive.

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