Moody's has downgraded the South Asian nation's GDP growth projection to 6.4%, calling for fiscal policy reforms

India's economic growth will slow to 6.4% in 2025, down from 6.6% in 2024, as new US tariffs and softening global demand weigh on exports, PTI news agency reported on Thursday, citing a report by Moody's Analytics. Growth across the Asia-Pacific economy will slow this year due to "trade tensions" and "policy shifts," according to the report.

Moody's expects that the federal budget recently announced by the Indian Finance Ministry should prioritize domestic demand, particularly investment, while aiming to reduce the fiscal deficit to less than 4.5% of GDP in the year 2025-26. The figure currently stands at 4.9%, compared to 5.6% in the last fiscal year. A fiscal deficit occurs when a government's total expenditures exceed its total revenues, resulting in a shortfall.

Moody's Analytics economist Aditi Raman noted that India faces significant economic risks in 2025, including a declining rupee, reduced foreign investment, and volatile inflation. There are also risks associated with potential US tariffs on Indian imports, which will make for a "challenging export environment that hampers growth," stated Raman. Nevertheless, the impact is likely to be limited due to India's relatively "closed economy," which reduces its dependence on international trade and makes it less vulnerable to external trade shocks, the analyst added.

Despite being one of the fastest-growing economies in Asia in 2024, India's GDP growth slowed down over the first three quarters, making policy adjustments crucial for future growth, according to economists. The slowdown versus 2023 sets a "cautious tone for 2025," Raman said.

India's economic growth rate slowed significantly in the July-September quarter of 2024, reaching 5.4%, which was the lowest in seven quarters. It marked a significant slowdown after the government estimated an annual growth figure of 8.2% for the 2024 financial year, surpassing the 7% growth in the 2023 fiscal. The decline is attributed to various factors, including global uncertainties, weakening urban demand, declining exports, and a reduction in government capital expenditure.

The growth rate in previous quarters of last year stood at 8.2% in FY24, but the recent slowdown has fallen short of market expectations, highlighting the need for policy intervention to revitalize the economy.

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In an effort to stimulate economic growth, the Indian government has introduced key reforms in the federal budget for the 2025 fiscal year, prioritizing consumption over capital expenditure. A significant measure is the increase in income tax exemption limits, aiming to put more money in the hands of consumers and boost spending, thereby driving economic growth.

Moody's also noted that US President Donald Trump's victory has put pressure on the Indian rupee, leading investors to sell Indian assets for US dollars. Despite the Reserve Bank of India's intervention, the rupee continued to fall in early 2025, hitting a record low of Rs 86.6 to the US dollar by mid-January. Economists expects the rupee to keep depreciating as India's growing middle class increases reliance on imports, making it difficult for the central bank to stabilize the currency.