Even though we believe India is among those less at risk from tariffs relative to Asia's more open economies, it is not immune.
FinTech BizNews Service
Mumbai, 29 November, 2024: A report by Tanvee Gupta Jain, UBS Chief India Economist, titled “India Economic Perspectives" provides insightful growth forecasts about India.
Goldilocks? Lowering India's FY26 growth forecasts by 50bp to 6.3%
Our baseline assumes the incoming Trump administration will impose additional tariffs on most imports from China in a staged manner, starting in H225. Building in softer domestic growth and a negative drag from potential tariff hikes, we lower India's growth forecasts by 50bp to 6.3% YoY in FY26 (consensus at 6.6% YoY). Even though we believe India is among those less at risk from tariffs relative to Asia's more open economies, it is not immune. We expect India's growth to recover to 6.6% in FY27, on supportive policy measures and strengthening of 'China + 1' supply chain shifts to India. Among emerging markets, we continue to expect India to remain one of the fastest growing major economies in 2024-26E.
What will Trump 2.0 mean for India?
We believe India's growth could be affected by trade tariffs from various channels: 1) slowdown in global growth due to lower US and China growth; 2) a further delay in India's private corporate capex recovery due to the risk of China offloading excess capacity in the manufacturing sector; and 3) greater depreciation pressure on China's RMB having implications for India's net goods trade balance. However, we believe global policy shifts could offer new opportunities and strengthen the case for 'China + 1' supply chain shifts to India in the medium term.
Macro stability risks likely to remain manageable
Amid rising global uncertainties, we expect India's macro stability risks to remain largely contained in FY26 with 1) headline inflation to decelerate towards 4-4.5% YoY; 2) aggregate fiscal deficit to narrow further to 7.4% of GDP; and 3) current account deficit to remain contained (well below 2% of GDP) despite concerns of regional trade slowdown. We see scope for 75bp of monetary easing in this cycle from early CY25, building in slower domestic growth and lower global rates. Our UBS EM rates strategist forecasts year-end 10-year IGB yields at 6.25% in FY26 (vs. 6.5% in FY25 UBSe). We think USDINR will not be immune to trade tension-driven USD strength (vs. EM peers) and expect year-end INR to reach 87.0 by FY26 (vs. 84.5 in FY25 UBSe).
Reforms to start paying off and stabilise India's medium-term growth
We expect India to be able maintain potential real GDP growth of 6.5% YoY over FY26- 28, making it world's third- largest consumer market in 2026 and third-largest economy by 2027 (after US and China). We expect India's nominal GDP to increase from cUS$4trn in FY25E to US$6trn-plus by FY30E. We believe India's potential growth could benefit from manufacturing and export push, increased services exports, and digitalisation, leading to improvement in productivity and efficiency gains. However, challenges remain, including the provision of productive jobs for the rising working-age population, a less friendly external environment and the automation overhang.
Alternative economic scenarios - upside and downside risks
First, a reignition of the US-China trade war could push supply chain shifts. Since 2019, India has improved markedly on many key fronts which could help India gain in the medium-term. Second, we could be surprised positively, if US resilience continues or China's stimulus proves to be larger/more effective than forecasted. Third, the US recession scenario would take the Fed funds rate back to the lower bound leading to higher downside risks to India's growth and faster easing. Lastly, in case US imposes a 10% import tariff on ROW, the negative drag on India's growth could persist in FY27.
