India delivered a stronger-than-expected economic performance in the September quarter, expanding by 8.2% despite facing a new round of external pressures from steep U.S. tariffs. The acceleration in growth underscores the resilience of domestic demand, the revival of key sectors such as manufacturing and construction, and the government’s use of tax measures to offset global trade headwinds. At a time when global conditions remain volatile and several emerging markets are slowing, India’s continued outperformance signals an economy increasingly driven by internal fundamentals rather than external trade cycles.

How India Sustained High Growth Despite Tariff Headwinds

The September quarter marked India’s first full period under the new 50% U.S. tariffs on a range of Indian exports. The measures, which came into effect in August, were expected to weigh heavily on India’s headline figures, particularly given the country’s dependence on the U.S. for a substantial share of high-value manufactured exports. Yet the economy expanded at a pace far above forecasts, revealing several layers of resilience.

One of the key reasons India absorbed the tariff shock is the rising prominence of domestic drivers in GDP growth. Over the past two years, India has steadily reduced its reliance on net exports, with consumption, investment and government spending forming the backbone of expansion. When tariffs disrupted export momentum, these domestic engines helped cushion the blow.

At the same time, India benefited from a favorable base of industrial activity, steady urban demand, and an improving employment landscape. Manufacturing output expanded sharply, supported by stronger capacity utilization and the re-acceleration of production in sectors tied to construction, real estate and infrastructure. Construction activity also surged, driven by both private investment and continued public spending on highways, metro projects and urban development.

The resilience was further supported by a moderation in input prices. Although global crude prices remain volatile, India experienced relative stability in energy and commodity costs during much of the quarter. Lower inflationary pressure allowed real growth to remain robust even as nominal GDP growth held roughly steady.

Domestic Consumption as the Core Growth Stabilizer

The September quarter also highlighted the importance of domestic consumption as a stabilizing force in India’s economy. Although demand growth slowed temporarily ahead of expected goods and services tax (GST) cuts, households remained broadly optimistic, supported by income-tax reductions, urban employment growth and improving sentiment in the services sector.

In late September, New Delhi introduced sweeping GST reductions aimed at cushioning the impact of tariffs and stimulating demand for consumer goods, electronics, vehicles and discretionary categories. The tax cuts were designed to boost disposable incomes and encourage purchases that had been postponed in anticipation of lower prices.

The effect of the policy shift became visible almost immediately. October saw record sales in automobiles, including both passenger vehicles and two-wheelers, reflecting pent-up demand. Gold imports surged as jewelry retailers capitalized on festive-season sentiment and tax-driven increases in disposable income. Retailers across electronics, apparel and home goods reported strong foot traffic and brisk sales, reversing the slight hesitancy seen earlier in the quarter.

The revival in consumption also reflects deeper structural changes in India’s economy. Rapid urbanization, rising per-capita incomes, and expanding middle-class spending power continue to transform consumption patterns. These trends create a buffer against external trade shocks by expanding the share of GDP generated domestically rather than through export-driven sectors.

Manufacturing, Construction and Services Drive the Upswing

The September quarter’s growth acceleration was heavily influenced by sectoral dynamics. Manufacturing rebounded strongly, benefiting from improved supply-chain stability, better availability of credit and momentum in private-sector capital spending. Firms across industries such as automobiles, pharmaceuticals, consumer durables and electronics reported increased output to meet both domestic and overseas demand.

Construction, a segment highly sensitive to economic sentiment and credit conditions, also performed robustly. Rising demand for housing, a surge in commercial real estate development and government-backed infrastructure expansion all contributed to heightened construction activity. The sector, which has extensive backward linkages to cement, steel, logistics and services, amplified growth across multiple industries.

The services sector — India’s largest contributor to GDP — sustained double-digit growth in financial services, professional services and real estate. Banking activity increased as credit disbursement remained strong, while insurance and digital financial products expanded their penetration. Real estate transactions rose in key cities due to lower borrowing costs, stable prices and post-pandemic demand normalization.

Technology services remain a pillar of India’s services exports, even though global IT spending has softened. The sector has shifted increasingly toward AI-related services, cloud management and enterprise digital transformation, helping offset the slowdown in traditional outsourcing models.

The Dual Effect of Tariffs: Drag on Exports but Catalyst for Domestic Policy Action

The introduction of 50% tariffs by the United States created both immediate and secondary effects for India’s economy. In the short term, the measures dented merchandise export volumes. India’s goods trade deficit widened during the quarter, exacerbated by weaker external demand and higher gold imports.

Yet the tariffs also pushed India to accelerate policy responses aimed at strengthening domestic purchasing power and reducing external vulnerability. The GST cuts stand out as the most direct intervention. Alongside income-tax reductions, the tax adjustments help sustain consumption momentum and balance the drag created by weaker exports.

Tariffs also reinforced India’s long-term policy objective of reducing reliance on overseas markets and building a more resilient domestic growth engine. Over the past decade, India has steadily repositioned itself as a consumption-driven economy, with government initiatives emphasizing manufacturing for domestic markets, infrastructure development and digital-first delivery of public services.

These long-term strategies helped the country weather the tariff shock more effectively than previous trade disruptions. While exports remain a key component of broader economic performance, India’s shift toward internally driven growth provides significant insulation during periods of global volatility.

Economic Outlook Strengthened by Policy Support but Constrained by Trade Uncertainty

India’s better-than-expected performance has prompted economists to revise their forecasts upward for the fiscal year, with private sector analysts citing domestic resilience as a major driver. Yet the outlook remains shaped by global conditions, especially the trajectory of U.S.-India trade negotiations and the future path of global economic recovery.

The International Monetary Fund has highlighted India’s ability to sustain high growth despite external headwinds. However, it projects a modest slowdown in real GDP growth over the next two fiscal years amid expectations of prolonged trade uncertainty. Export performance is likely to remain weak in the near term due to tariff impacts, while import growth is expected to continue rising due to strong domestic demand.

Even so, India’s macroeconomic fundamentals remain solid. Inflation has eased from earlier peaks, monetary policy is supportive of growth, and credit expansion continues at a healthy pace. The government’s infrastructure push, focus on manufacturing competitiveness and reinforcement of consumption through tax policy provide a strong foundation for continued momentum.

The combination of resilient domestic demand, proactive policy interventions and strengthening sectoral performance explains how India’s economy expanded at 8.2% despite being hit by its most significant tariff burden in years.

(Adapted from CNBC.com)

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