India’s economy showed signs of recovery last quarter, but uncertainties remain as global trade risks loom, especially with US President Donald Trump’s tariff threats. According to economists surveyed by Bloomberg, GDP likely grew by 6.2% in the October-December period, an improvement from the 5.4% recorded in the previous quarter. However, this figure still falls short of the central bank’s 6.8% projection. The Indian government has already revised its GDP growth estimate for the fiscal year ending in March down to 6.4%—the slowest pace since the pandemic. Further downward revisions are expected on Friday, with next year’s growth forecasted to remain below 7%, significantly lower than the 8% needed to achieve Prime Minister Narendra Modi’s vision of making India a developed nation by 2047.

The recent boost in economic activity was largely driven by increased government spending and strong rural consumption. However, given India’s high exposure to Trump’s tariff policies, the road ahead remains uncertain. Sonal Varma, chief economist at Nomura Singapore Ltd., noted that weak exports and sluggish urban consumption could weigh on GDP growth, emphasizing the need for policies that stimulate domestic demand as external factors may not provide much support.

Government spending played a key role in the rebound. After a slowdown during the elections, the government accelerated its infrastructure investments, spending Rs 2.7 trillion on roads, ports, and highways in the last quarter of 2024. By December, 61.7% of the budgeted capital expenditure had been utilized, compared to just 37.7% in September. Meanwhile, rural consumption got a lift from a strong harvest and festive-season spending during Diwali.

To further stimulate the economy, the finance minister announced a record Rs 1 trillion in tax cuts earlier this month. Shortly after, the Reserve Bank of India (RBI) cut interest rates for the first time in nearly five years, expressing concerns that overly tight monetary policies could hinder economic growth.

Looking ahead, most economists surveyed by Bloomberg predict the RBI will lower rates by another 50 basis points in 2025 to boost demand. The central bank is also injecting over $25 billion into the banking system to ease a liquidity crunch. While economic indicators showed improvement in December, early data from January suggests some softening, particularly in trade and transportation. Pranjul Bhandari, an economist at HSBC, summarized the situation: “Even though December’s GDP data looks promising, continued support from RBI rate cuts and liquidity measures will be essential to sustain the recovery.”

Disclaimer: This image is taken from Bloomberg.