Moody’s Slashes India’s 2025 Growth Estimate, Citing U.S. Tariff Impact and Domestic Challenges

Moody’s Analytics has revised India’s growth forecast for 2025, cutting it by 30 basis points to 6.1% from the previously anticipated 6.4%. The revision reflects growing economic challenges, particularly those stemming from external factors, such as the ongoing trade tensions between the United States and China, and the ripple effects of tariffs imposed by the U.S. on Chinese imports. Despite this downward adjustment, the country remains one of the fastest-growing major economies globally. However, there are concerns that external risks could dampen India’s economic momentum in the short term.

The Impact of U.S. Tariffs and Global Economic Uncertainty

The primary reason for Moody’s decision to reduce India’s growth forecast stems from the mounting economic risks arising from the global trade environment. The U.S. tariffs on Chinese goods, which have been in place since 2018, have affected not just China but also economies worldwide, including India. In particular, the U.S.-China trade war has disrupted supply chains, increased uncertainty in global markets, and contributed to higher input costs, which ultimately impact India’s exports.

Moody’s highlights that India’s exposure to global supply chains and international trade has made it vulnerable to the economic ripple effects of the U.S. tariffs. As a major exporter of goods like textiles, gems and jewelry, and medical devices, India is feeling the pressure from tariff hikes on these products entering the U.S. market. With the trade disruptions affecting the demand for Indian exports, the growth of key sectors that contribute to the country’s GDP has been hampered.

Additionally, India’s economic growth has been impacted by global inflationary pressures, which have contributed to higher input costs across various industries. This has put a strain on businesses in India, particularly in manufacturing, agriculture, and exports. The rising costs of raw materials, coupled with slower demand growth in some international markets, have further intensified the economic challenges for Indian businesses.

Internal Factors: Inflation and Policy Shifts

In addition to external risks, internal factors are also playing a role in slowing down India’s economic growth. Consumer inflation has remained persistent, with food prices, particularly staples like cereals and pulses, continuing to push inflationary pressures. High inflation erodes purchasing power, thereby impacting household consumption, which is a critical driver of India’s economic growth. This, in turn, could temper the pace of recovery from previous periods of slowdown.

To manage these challenges, the Reserve Bank of India (RBI) has made policy adjustments, including a series of interest rate cuts. The central bank has moved toward a more accommodative monetary policy to support economic activity by making borrowing cheaper for businesses and consumers. However, despite these efforts, inflation continues to be a significant concern, limiting the potential impact of monetary policy measures on reviving growth.

Additionally, the government’s fiscal policies aimed at stimulating demand and investment have been somewhat constrained by the need to maintain fiscal discipline. While India’s government has rolled out several initiatives, including the Production-Linked Incentive (PLI) Scheme to promote domestic manufacturing, the pace of implementation and the scale of these measures may not be sufficient to offset the external headwinds in the short term.

The Outlook for Key Sectors: Manufacturing and Services

India’s economic recovery will largely depend on the performance of its key sectors: manufacturing, services, and agriculture. While the services sector, especially technology and finance, continues to grow, its contribution to India’s overall GDP growth remains limited by external factors like the global slowdown and trade disruptions. The IT sector, which is a major source of exports, faces growing competition from other emerging markets and is susceptible to changes in global demand patterns.

The manufacturing sector, which has been one of the primary drivers of India’s growth in recent years, is also under strain. Although the Indian government has been pushing for greater domestic production through policies like the PLI Scheme, the sector has faced several challenges, including higher raw material costs, labor issues, and slow infrastructure development. These challenges, combined with external disruptions, have led to a weaker growth outlook for manufacturing, a sector that is crucial for creating jobs and boosting exports.

The agricultural sector, which provides employment to a large portion of India’s population, faces its own set of challenges. While the government has taken steps to support farmers, issues like water scarcity, land degradation, and poor infrastructure continue to hinder productivity growth. Additionally, rural consumption, which is important for sustaining the domestic economy, may be constrained due to inflationary pressures and slow agricultural growth.

India’s Resilience and Long-Term Outlook

While Moody’s Analytics has lowered India’s growth forecast for 2025, it remains optimistic about the country’s long-term economic prospects. India continues to be one of the fastest-growing economies globally, driven by a young and growing population, an expanding middle class, and a booming digital economy. The country is also increasingly becoming a hub for foreign direct investment, particularly in sectors like renewable energy, manufacturing, and technology.

Furthermore, the government’s ongoing efforts to improve infrastructure, boost domestic production, and attract investment should help India achieve more sustainable and inclusive growth in the medium to long term. Initiatives like the National Infrastructure Pipeline and smart city development projects are expected to create more opportunities for growth and employment, though their impact may take time to materialize.

Moody’s Analytics’ decision to lower India’s 2025 growth forecast reflects a combination of external economic risks and domestic challenges, including inflation and slower export growth. However, India’s long-term economic prospects remain positive due to its demographic advantages, growing digital economy, and ongoing policy reforms. While the immediate outlook for 2025 may be more subdued, India is well-positioned to recover and continue its path toward becoming a major global economic player in the coming years. The key for India will be navigating global uncertainties while implementing policies that stimulate growth, enhance productivity, and address inflationary pressures.