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5/12/2025
India’s economic outlook remains attractive, and the recent market pullback creates an entry opportunity for investors
Maria Milina
Research Analyst
Elke Speidel-Walz
Chief Economist Emerging Markets
The macroeconomic investment case for India has become increasingly compelling. India’s economic ascent is driven by strong domestic consumption, digital transformation, and government-led reforms. A decade ago, India was part of the ‘fragile five’,[1] mainly because of its former relatively high current account deficit, but it has since transformed into a favoured destination for Emerging Market investors. India’s demographic advantage is well recognized, stemming from a combination of the world’s second-largest labour force, with approximately 694 million people (second only to China), and a relatively young population with a median age below 30. Now India needs to capitalize on its window of favourable demographics and increase per-capita income levels. This article explores why investors should consider a standalone India equities allocation in a global portfolio. First, we assess the macroeconomic landscape and the growth outlook, including the potential impact of the recent U.S. tariffs, and second, we evaluate the fundamentals of India’s equity market and whether the recent pullback presents a buying opportunity.
As our last year CIO special report[2] points out, India has always combined great potential with big challenges. We believe the challenges are being tackled more actively, making the country attractive from a strategic point of view. In Figure 1, we summarize our India’s economic outlook, highlighting the opportunities and challenges for the country’s macro growth story. In the following few sections, we provide more detail on some of these considerations.
Our medium-term outlook for India’s real GDP growth is set at 6.5%. The growth slowdown seen in 2024 was from unsustainably high levels previously, Figure 2. While there are short-term challenges stemming from geopolitics, FX pressure, FX reserves fall, and elevated inflation, in the medium-term, we expect public sector investment to normalize, private investment to step in, consumption demand to remain robust, and other growth drivers such as ongoing advances in productivity and competitiveness to be preserved.
We consider the growth in 2021-2023 which came in at roughly 9% yoy (after revisions) to be rather an outlier than a norm, aided by the strong rise (15% yoy) in a few sectors, including so called ‘New India’ (15% of GDP, including mobile handsets, digital startups and other). The related jump in incomes and demand for luxury goods and real estate is also levelling around more sustainable levels. Growth in service exports has normalized from 27% yoy in 2022 and 2023 to a still high 14% in 2024.
The Indian economy will be likely less impacted by the global tariff challenges over the coming years than its emerging market peers in Asia because India is a large country with a steadily increasing consumer base, while the external trade (net exports) is not a main economic growth driver. Yet it is currently difficult to forecast how the U.S. tariff policy will further develop. The reciprocal tariff shocks and the potential global demand fallout could impact our outlook of 6.5% for the GDP growth.
President Trump proposed a 26% tariff on India due to take effect from April 9, 2025. This is much higher than market expectations but lower than tariffs on Asian peers. However, as a bilateral trade agreement between the U.S. and India is under negotiation, the net impact could be reduced. We think the prolonged global uncertainty could have greater implications for financial markets than macro economy. Still, the risk for a 25bp lower GDP growth rate this year is rising. The Indian central bank is expected to counter the growth risks and high uncertainty with various key rate cuts in 2025 along with potential liquidity measures. Besides monetary eas-ing, prudential fiscal easing could be pursued to boost private consumption, which is responsible for nearly 60% of India’s GDP.
Headline inflation in India is expected to average 4.0% yoy in the 2025 calendar year, with food inflation normalizing below 5% from 7%+ in 2024, thanks to adequate weather conditions, Figure 3. Following two rate cuts by 25 bps each at the start of 2025 (lowering the rate to 6%), the Reserve Bank of India (RBI) signalled more easing to come by shifting its policy stance to accommodative. A structural reason for India’s high and volatile inflation is the extraordinarily high weight of food prices in inflation. This can only be improved by agricultural reforms reducing exposure to weather effects and by raising income in the rural regions (as the higher the income, the lower is the weight of food prices in the inflation indicator).
In 2013, Morgan Stanley coined the term ‘Fragile Five’ to represent emerging market economies that have become too dependent on unreliable foreign investment to finance their growth ambitions. The five members of the Fragile Five include Turkey, Brazil, India, South Africa and Indonesia.
DWS (February 2024). “India – a poorly kept secret”
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