- Many markers of domestic demand and capital market vitality have softened.
- Income tax reform, RBI rate cuts, and GST rationalisation; 3 supportive salvos have been launched.
- With US-bound exports facing uncertainty, India is pursuing non-US deals.
- Capital market activity may have eased lately, but holds considerable promise.
- India’s public and private sector response to the various challenges is heartening.
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Commentary: India’s revised playbook
India’s reform trajectory is undergoing a revision, underscoring an imperative to re-balance its strategic partnerships and an urgency to boost domestic demand. The focus of the past decade, with a focus on Western alliances and external demand-led growth, is facing headwinds. Policy and geopolitical developments so far this year underscore a substantial pivot.
The GDP data may tell a story of broadly satisfactory outcome, with real growth surprising on the upside in April-June (up 7.8%yoy), but the overall direction of domestic demand has been worrisome. Investment has slowed, as has the rate of nominal GDP and wage growth, along with striking softness in the savings rate. Additional worries stem from deposit and loans hitting their lowest growth rates in four years. Capital markets, exceptionally buoyant in recent years, have also lost momentum over the past 12 months.
An imperative to add momentum to domestic activities was felt from early-2025 onward, culminating in three major policy support measures. First, back in February, the authorities pushed through higher income threshold for taxation and lower rates aimed at those at the middle and lower-middle end of the income spectrum. Second, between February and June, the Reserve Bank of India cut the policy rate by 100bps, reflecting a tilt from fighting inflation, which had been easing sharply, to supporting growth. Finally, at the beginning of September, a wide-ranging rationalisation of the Goods and Services Tax (GST) regime was announced, with elimination of several higher tax slabs.
These measures add up to substantial support for the economy. To live up to the aspiration of sustained strong economic growth, domestic consumption, income, and investment needed some timely boost, in our view.
This is even more resonant given external demand uncertainties, with US tariffs jumping to a surprisingly high 50%, with both pharma and semiconductor sectors exposed to more measures likely forthcoming from President Trump. While India has left the door open for rapprochement with the US, it is also pursuing a wide range of measures focused on the non-US world. Trade talks with EU have gathered momentum, a number of investment deals with Singapore was announced last week, and some strategic thaw with China is amply visible.
It’s not all about reacting to the US. This year’s lacklustre performance notwithstanding, the Indian stock market’s strong run over the past few years have created two strong dynamics. First, multinational companies are increasingly keen to list their Indian operations, encouraged by the experience of Hyundai India’s IPO trading at a higher multiple than its parent company. Second, with many Indian companies trading at 20+ PE, they have acquired the wherewithal to fund mergers and acquisitions overseas in lower PE markets like Japan and South Korea. This not only bodes well for wealth creation, but it also helps India’s manufacturing sector with much-needed technology transfer.
India’s public and private sector participants are therefore energised by the myriad of geoeconomic challenges. The attitude is not of shock and paralysis, rather one of pivoting to a new playbook with ample ammunitions.
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