Impact of Trump Shock on Indian Economy: An Assessment: FY 2024-25: Year End Macroeconomic Review

This study provides an assessment of the performance of Indian economy in 2024-25 and a review of the outlook going forward factoring in the impact of disruptive policies of the second Trump administration at home and abroad, especially the announced `reciprocal' tariff policies that are temporarily paused. The impact of the `reciprocal tariffs' when the present pause ends is likely to be mixed. While India's top ten exports to the US, such as electronic goods, gems jewellery, machinery, textiles, metals and transport equipment may be adversely affected by higher tariffs, India may garner greater market share in products such as footwear, apparel, electrical machinery, toys, etc., where India's competitor countries are subject to higher tariffs. Growth moderated in FY 2024-25, probably due to the slowdown in government spending and investment growth. Inflation being benign has enabled the central bank to change its monetary policy stance to `accommodative', further cutting the Repo rate and taking other measures to enhance liquidity. Looking forward to FY 2025-26, our outlook for GDP growth remains pessimistic, amid rising trade uncertainty and anticipated slowdown in United States (US) and global growth. However, the accommodative monetary policy stance positions the central bank well to pursue expansionary policies to counter growth slow down. On the fiscal side, FY 2024-25 saw a sharp contraction in central government's capital expenditure growth. States' combined capital expenditure also contracted sharply during April-Feb 2024-25. The central government has shifted to a new fiscal consolidation framework with debt-to-GDP ratio as the key monitoring target. This provides more elbow room for increasing capex to revive growth should it slow down due to the Trump Shock. Such a slowdown would also lead to a shortfall in budgeted revenues of the central and state governments, thereby raising deficits. This would serve as an automatic stabiliser to help revive growth, which could be reinforced by enhanced government capex.