India’s Growth Outlook Under Pressure — When External Shocks Bite

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01 Oct, 2025

India’s Growth Outlook Under Pressure — When External Shocks Bite

Introduction

India has long been one of the world’s fastest-growing major economies. Even as global growth slows and trade tensions rise, India has had the cushion of strong domestic demand, reforms, and a relatively diversified economic base. But recent developments—especially the imposition of higher U.S. tariffs on Indian exports—pose nontrivial challenges.

Recently, the Asian Development Bank (ADB) revised India’s growth forecast for fiscal year 2025-26 (FY26) downward to 6.5%, from earlier estimates of 6.7% or even 7%. The revision was driven largely by concerns over how U.S. tariff policies will reduce export demand, disrupt supply chains, and dampen investment flows.

In this blog, we explore the reasons for the revision, what this means for different sectors, and how India might mitigate the fallout.

Why the Downgrade?

1. Trade & Export Headwinds

U.S. tariffs increase the cost of Indian goods in the U.S. market, reducing competitiveness.
Several key export sectors—textiles, garments, jewellery, chemicals, shrimp—could see direct impact.
With weakened global demand, some export orders may be canceled or shifted elsewhere.

2. Policy Uncertainty & Investment Impact

Higher tariffs create ambiguity for businesses planning export strategies.
Foreign direct investment (FDI) and capital flows are sensitive to uncertainty; some investors may adopt a wait-and-see stance.

3. Global Slowdown & Spillovers

The U.S. trade tensions may ripple into other economies, weakening demand for Indian exports overall.
Supply chain disruptions, rising costs of raw materials, or tighter credit conditions globally may also feed into India’s firms.

4. Mitigating Domestic Factors (But Limitations Remain)

ADB and other agencies still expect consumption, services, and agriculture to provide resilience.
But domestic demand alone may not fully offset external drag, especially if the export slowdown is steep in the second half of FY26.

What This Means for the Indian Market

The revised outlook doesn’t imply recession or crisis — 6.5% is still a strong growth rate. But the cut signals more modest optimism and warrants caution, particularly in sectors exposed to global trade. Here’s a sectoral breakdown and potential market consequences:

Sector / Area	Likely Impact	Notes & Mitigants
Exports / Export-oriented industries	Moderate to significant headwinds	Industries heavily selling to U.S. (textiles, gems, chemicals) will face margin compression or order losses. May need to shift to other markets.
Manufacturing & Supply Chains	Disruption of input sourcing, cost pressures	Firms dependent on imported inputs may see cost escalation; supply chain reengineering needed.
Investments / Capital Markets	Slower growth in investment, cautious capital inflows	Corporate capex may be postponed; FDI flows may become more conservative.
Banking & Finance	Higher credit risk for export firms, pressure on NPLs	Lenders may tighten credit to sectors facing stress; risk premiums increase.
Consumer & Domestic Demand	More stable buffer	Rural demand, consumption, and services sectors may partially absorb the shock.
Public Finance / Fiscal Policy	Strain on revenue vs. balance	Slower growth means lower tax collections; governments may need to recalibrate spending or borrowing.
Monetary Policy	Room for easing, but inflation risk	RBI may lean dovish to support growth, but must guard against inflationary pressures.

Three Strategic Responses / Mitigations

Diversify Export Markets & Products
- Explore non-U.S. markets (e.g. Africa, ASEAN, Latin America)
- Move up the value chain (specialty or niche goods)
Strengthen Domestic Demand & Stimulus
- Tax cuts, consumption incentives
- Infrastructure and public investment to absorb slack
Policy & Diplomatic Engagement
- Negotiate with U.S. for tariff relief or exemptions
- Trade agreements, bilateral pacts
- Reduce trade barriers internally, improve ease of doing business

Outlook & Key Risks to Watch

If U.S. tariffs persist or deepen, further downward revisions may occur.
A turnaround will depend on whether tariff policies are reversed, global demand revives, or India can successfully reorient its trade.
Inflation, fiscal deficit pressures, or external shocks (oil, commodity prices) may exacerbate vulnerabilities.

Overall, while the tone is more cautious, India’s growth trajectory remains among the best globally — the challenge is navigating external headwinds smartly.

By Nehal Taparia

This content is for educational and knowledge purposes only and should not be considered as investment or Trading advice. Please consult a certified financial advisor before making any investment or Trading decisions.

Our Recent FAQS

Frequently Asked Question &
Answers Here

Q1. Why did ADB cut India’s growth forecast to 6.5%?

Because U.S. tariff hikes on Indian exports are expected to reduce demand for Indian goods abroad, disrupt trade, and discourage investment, thereby slowing growth.

Q2. How large is the cut compared to earlier forecasts?

Earlier forecasts (in April or mid-2025) ranged from 6.7% to 7%. The 6.5% projection is about 0.2–0.5 percentage point downward revision.

Q3. Which sectors are most vulnerable?

Export-oriented sectors (textiles, garments, gems, chemicals) are at higher risk. Also, manufacturing firms with tight margins and high dependence on imported inputs may suffer.

Q4. What buffers does India have?

Strong domestic demand, services sector strength, good monsoon for agriculture, and fiscal/monetary tools are seen as cushions.

Q5. Could growth decline further?

Yes—if tariffs worsen, global demand shrinks, or other shocks (commodity prices, financial stress) hit India. But much depends on policy responses and external developments.

Q6. What policy moves can help moderate the impact?

• Trade diplomacy & tariff rollback
• Stimulus packages, targeted subsidies, tax incentives
• Infrastructure and capex acceleration
• Reforms to improve export competitiveness

Q7. How will this affect the stock markets / investors?

Investor sentiment may become more cautious, especially for export-heavy companies. Valuation multiples might compress for risky sectors. Defensive stocks or domestic consumption plays may get more attention.

Q8. Is this revision drastic? Is growth still good?

It’s not a crisis—6.5% is still solid growth by global standards. But it signals that India’s “headroom” has narrowed and that the external environment will be a significant drag without stronger domestic support.