Nonetheless, the country faces challenges in 2025. The economy is showing signs of slowing. Equity markets have corrected sharply over the last few months due in part to muted near-term earnings growth. Valuations remain perennially on the higher side. Additionally, a second Donald Trump presidency could strain trade relations. Should investors worry?
While caution is always warranted, we believe the answer is no. Let’s break it down.
Trade
India’s insulation
President Donald Trump has made his intentions clear on tariffs, calling them “the most beautiful word in the dictionary.” China, Mexico, and Canada are first in his sights. He has also threatened to impose 100% tariffs on BRIC countries, including India.1
The prospect of restrictions on trade is, of course, worrying. India is a significant exporter of IT services and pharmaceuticals to the US. The US’s trade deficit with India is relatively small compared to the other major economies (Chart 1). This should lower India's target list when the opening salvos are fired.
Chart 1. US trade balance vs. Selected global countries, $US billion (2023)
Furthermore, India has substantial foreign exchange reserves, amounting to US$635 billion in late November.2 These reserves should provide a buffer to defend the rupee if necessary and enable the Reserve Bank of India (RBI) to conduct open market operations, ensuring ample liquidity in the system.
Most importantly, India's economy is primarily driven by domestic factors, providing built-in resilience against global economic upheaval.
Economy
Think global, act local
Approximately 80% of India’s GDP growth is fueled by internal investment, consumption, and government spending.3
Over the last decade, the government has implemented several painful yet crucial reforms, putting India on a more stable economic footing. For example, the 2017 Goods & Services Tax simplified India’s tax structure, while lower subsidies strengthened the government’s fiscal position. These measures have reduced reliance on new bond issuance as a funding source. The government also took additional steps to lower the cost of doing business in India.
On the corporate front, the acceleration of digitalization has enhanced efficiency and, ultimately, drives profitability. Meanwhile, efforts to clean up bad debt in the economy have bolstered company balance sheets.
In recent years, the government has spent on infrastructure development projects ... and private capital expenditure has followed.
In recent years, the government has spent on infrastructure development projects such as building roads, ports, and railways, and private capital expenditure has followed.
Moreover, India aspires to become a global manufacturing hub like China, piggybacking on the international supply chain diversification trend. Thanks to the country's skilled yet cost-effective labor pool, India is already a global hub for IT services and other back-office functions.
Since the pandemic, many multinational corporations have sought to reduce risk by diversifying their supply chains – the China Plus One manufacturing strategy. With its large, young, educated, and English-speaking workforce, India stands to benefit from this trend over the long run.
The government has encouraged companies to shift their manufacturing bases to India through initiatives such as production-linked incentive schemes. These offer tax breaks and investment subsidies, especially for high-end manufacturing sectors such as smartphones.
Unemployment, historically a drag on the economy, is improving. The rate tumbled from 6% in 2017 to 3.2% in 2024.4
Temporary speedbump in a promising growth story
The current economic climate has been more challenging. The economy is projected to grow 6.4% in the 2024–25 fiscal year (down from 8.2% the previous year), the slowest in four years.5 Multiple factors have contributed to this slowdown, including muted consumer demand and reduced government spending. We expect this will be a temporary lull.
There are signs that the long-overdue recovery in rural demand is gradually materializing.
While urban demand may remain affected by near-term inflationary pressures, there are signs that the long-overdue recovery in rural demand is gradually materializing. Last year’s bumper monsoon should help propel this shift. Government spending on capital projects is expected to pick up now that the disruptive general election is over and the extended monsoon rains have finally ceased. Construction activity should also resume.
Since 2017, the Union Budget of India has been presented annually on February 1. We will listen closely to Finance Minister Nirmala Sitharaman outline India's financial trajectory for the upcoming year and look for signs of the government’s spending priorities. Meanwhile, after a prolonged period of stable interest rates, the RBI has scope to cut rates this year.
Earnings growth
India’s earnings growth has moderated in recent quarters, alongside a steep and prolonged stock-market correction. This trend has been primarily driven by financials and consumer sectors, which constitutes a significant percentage of local indices. However, growth persists in other sectors, such as telecommunications, IT, real estate, and pharmaceuticals. Structurally, we expect corporate profit growth to remain robust, bolstered by macroeconomic tailwinds and strong balance sheets.
Despite these interim challenges, our overall outlook is positive. We continue to favor companies that deliver resilient earnings growth underpinned by strong fundamentals such as pricing power and robust balance sheets.
Valuations
Recent corrections offer a chance to accumulate
Indian stocks have always been relatively more expensive than other emerging markets – the stellar performance since the pandemic has widened this gap. However, the recent correction, driven by a moderation in earnings growth, has caused valuations to pull back. Furthermore, some of the market premium is justified by the promising long-term backdrop and the impact of reforms feeding through to the broader economy. Corporate India is in relatively better shape than in the past, as reflected in steady earnings growth and companies delivering on their strategies.
For equity markets, it’s also essential to understand the change around domestic flows. We have seen increased retail buying, with a notable shift towards SIPs (systematic investment plans), with investors committing to regular monthly investments into mutual funds. While flows have moderated over the last three months, this trend could continue over the long term, with equity savings as a percentage of gross household financial savings around 9%.
Nonetheless, there’s still some froth in the market. Given our positive long-term outlook, we welcome the recent sell-off and view it as a buying opportunity. Ultimately, we take a bottom-up view and assess valuations on a stock-by-stock basis.
Final thoughts
Despite short-term challenges, India’s growth story remains compelling. Supportive central government policies and a decade of necessary economic reforms have put India on a positive trajectory. The country is also relatively insulated in the event of Trump 2.0 trade and tariff wars, giving the economy resilience in times of upheaval. In our view, the best way to capitalize on India’s potential is to invest in quality companies that benefit from long-term structural tailwinds, including aspirational consumption, infrastructure development, healthcare, and digitalization. With that, we believe an active, on-the-ground approach will remain key to unlocking this compelling investment opportunity.
1 "Trump threatens BRICS nations with 100 percent tariff." POLITICO, January 2025. https://www.politico.com/news/2024/11/30/trump-brics-tariff-trade-00192042.
2 "Foreign Exchange Reserves." Reserve Bank of India, January 2025. https://rbidocs.rbi.org.in/rdocs/Wss/PDFs/2T_100120257C22A459144C4F72B7241378BC53A3AB.PDF.
3 "Ficci revises India's GDP growth forecast at 6.4%, inflation at 4.8%" Times of India, January 2025. https://timesofindia.indiatimes.com/business/india-business/ficci-revises-indias-gdp-growth-forecast-at-6-4-inflation-at-4-8/articleshow/117298794.cms.
4 "India's unemployment rate falls from 6% to 3.2% in last seven years." Business Standard, December 2024. https://www.business-standard.com/markets/capital-market-news/india-s-unemployment-rate-falls-from-6-to-3-2-in-last-seven-years-124120500940_1.html.
5 "India’s economy to grow at 6.4 per cent in current fiscal: FICCI." Daily Excelsior, January 2025. https://www.dailyexcelsior.com/indias-economy-to-grow-at-6-4-per-cent-in-current-fiscal-ficci/.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
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