India's consumption push could ease the impact of Trump's tariffs, but a weak rupee poses risks

Published Wed, Sep 3 20253:00 AM EDTUpdated Wed, Sep 3 20254:08 AM EDT

Key Points

Two factors are expected to ease the impact of U.S. tariffs on the Indian economy, according to analysts: stronger than expected economic growth and improving domestic consumption.
Goldman Sachs recently raised India's real GDP growth forecast for the country.
Lower interest rates could mean more money in the hands of the consumer.

India has to grapple with steep U.S. tariffs , but two factors are expected to ease their impact, according to analysts: stronger than expected economic growth and improving domestic consumption. In September, Goldman Sachs raised its real GDP growth forecast for the country by 60 basis points to 7.1% and 6.7% for the calendar year 2025 and fiscal year 2026, respectively. The improved projection takes into account the negative impact of U.S. tariffs. The doubling of U.S. tariffs on most Indian imports to as much as 50% took effect last week, raising economic worries. Two days later, India's quarterly GDP data showed the economy expanding at 7.8%, beating estimates. The country's economic growth was boosted by the manufacturing, construction and services sectors, but lower-than-expected inflation also propped up real GDP growth. "Lower inflationary pressures, the impending adjustment of the GST slabs to allow for greater spending and the ongoing festive season through to Diwali in October will keep private consumption supported in 3Q25," OCBC Global Markets Research said in a report published on Sept. 1. However, it maintained its GDP growth forecast at average of 6% for the fiscal year 2026. The World Bank and International Monetary Fund project that the country's economy will grow 6.3% and 6.4%, respectively, for the fiscal year 2026. On Aug. 15, Prime Minister Narendra Modi announced a major goods and services tax revamp . GST, which currently has four slabs (5%, 12%, 18%, 28%) is expected to be simplified into a two-rate structure — 5% and 18% — according to Reuters, moving most goods to lower rates. The move is expected to boost consumption. Those reforms will come into effect by Diwali in October, a festive period in which consumption tends to pick up in India. The GST council meeting to discuss the proposed reforms will take place on Wednesday and Thursday. On top of that, the central bank's 50 basis point rate cut in June and expectations of another one later this year could mean more money in the hands of the consumer. Crisil, an Indian credit rating agency owned by S & P Global, said a report on Sept. 1 that it expects India's consumer demand to remain robust on account of "healthy rural incomes, lower inflation and interest rates, and government's tax relief." It also expects government investment spending to provide buffer against the impact of U.S. tariffs, a global trade slowdown and geopolitical uncertainties. "The key downside risk to growth this year is the US tariffs and slowing global growth, which are expected to hit growth through two key channels—exports and investments," Crisil added, while maintaining that private consumption will be the primary driver of GDP growth in 2025. In addition, "robust agricultural production" will help keep food inflation in check, it said. Crisil noted that the monsoon harvest has progressed well, adding that the sowing for June to September months is "up 3.4% on-year as on August 22." Weak rupee poses a risk On Friday, the Indian rupee reached an all-time low , closing at 88.3 against the U.S. dollar. It has since continued to hover around that level. "While it is not a doomsday situation, the global uncertainties, if it continues for long, could lead to the rupee going to 89/ USD to 89.5/USD in the near term, especially if the oil prices shoot up," said Mumbai-based Ashhish Vaidya, managing director and head of treasury India global financial markets, told CNBC. Along with exports being affected due to U.S. tariffs, Indian equity markets have also seen sell-offs from foreign institutional investors of nearly $4 billion in August alone and $16 billion so far this year, data shows, pressuring the rupee further. India is an importing nation and any significant weakness in currency will raise its import bill. Revenue softness from tax cuts, coupled with a higher import bill due to currency weakness, could affect the fiscal consolidation of Asia's second-largest economy. And any deviation from the fiscal deficit target of 4.4% of GDP could further weaken the currency. While the government has assured that it remains on course to meet its fiscal deficit target , more negative surprises on trade deals with U.S. or European partners could hamper that goal. "We continue to expect the RBI to manage its sizable, short-forward position, which together with the latest developments on tariffs and subdued portfolio flows, is likely to keep the INR under pressure and an underperformer among the other EM Asia currencies," Goldman Sachs said.