Under the New Trade Landscape Between China and India: In-depth Look at India's Economic Resilience, Consumption Recovery, and Structural Challenges

Following the economic resilience shown in 2025, the future growth narrative for the Indian economy is becoming more complex and structured. According to Goldman Sachs research, despite uncertainties brought by US tariffs, India's real GDP growth is expected to remain at 6.9% in 2026 and 6.8% in 2027, indicating that the underlying drivers of the Indian economy at the macro level remain strong.

Diversified Drivers of Consumption Recovery The core driver supporting Indian growth is not a single factor. In 2025, tax and GST cuts, along with central bank policy easing, jointly promoted a moderate recovery in consumption demand. It is noteworthy that rural consumption has rebounded thanks to a healthy summer crop harvest, while urban consumption is supported by both policy stimuli and an improving credit environment. Forecasts suggest that rural consumption will remain strong in 2026, projected to grow by about 7.7% year-on-year, demonstrating the Indian consumer market's strong resilience and vast growth potential.

Balancing Inflation and Monetary Policy Regarding inflation, although headline inflation remained around 2.2% in 2025 due to low food inflation, core inflation increased due to rising precious metal prices. Looking ahead to 2026, the policy adjustments by the Reserve Bank of India (RBI) will face a more delicate balancing act. Although interest rates have been cut, due to core inflation pressures, the US Federal Reserve may not have further room for significant rate cuts, signaling that the Reserve Bank of India will need to adopt a more cautious liquidity management strategy.

Minor Boost from Trade Policy and Macro Risks The new trade agreement between the US and India (tariff reduction from 25% to 18%) is seen as a potential growth catalyst, expected to bring an annualized GDP growth increment of about 0.2 percentage points. However, macro risks still exist. Despite strong services exports, capital inflows remain cautious, with the Indian stock market experiencing a net outflow of about $19 billion due to slowing earnings and trade agreement uncertainties. The market anticipates that the 2026 current account deficit may expand to $37 billion, mainly driven by increased imports of non-oil and non-gold goods. This highlights that while India enjoys the benefits of external trade facilitation, it must seek a delicate balance between inflation control and capital account stability.

Structural Changes in the Investment Environment For domestic investment, the uncertainty stemming from the US-India trade agreement is expected to alleviate some pressure, thereby improving the willingness of the private sector to invest. However, translating this willingness into actual capital expenditure (Capex) execution still faces a time lag. In the long term, the structural opportunities for the Indian economy lie in its large population dividend and accelerating digital transformation, which are expected to further solidify its position as a "global manufacturing hub," although short-term management of inflation and capital flow volatility will still be necessary.