India's economic resilience is expected to hold strong against the challenges posed by potential US tariffs and global trade disruptions, according to a recent assessment by Moody's Ratings on May 21, 2025. The agency suggests that India's large domestic economy, low dependence on exports, and strategic government initiatives will help the nation weather these external pressures.
Several factors contribute to this optimistic outlook. Government initiatives aimed at boosting private consumption, expanding manufacturing capacity, and increasing infrastructure spending are expected to play a crucial role in offsetting the weakening global demand. Easing inflation trends may also pave the way for interest rate cuts, further stimulating economic growth. The healthy liquidity in India's banking sector is also expected to facilitate lending and support economic activity.
Moody's points out that India's limited reliance on goods trade and its robust service sector act as buffers against potential US tariff impacts. While the United States is India's single largest export destination, the impact of US tariffs on India's overall economic growth is expected to be limited. This is partly due to temporary relief measures and India's comparatively lower dependence on goods exports compared to other emerging economies in the Asia-Pacific region. Furthermore, India-made goods could potentially benefit from increased US demand if trade negotiations lead to more favorable tariff treatment for India compared to other developing nations.
The ratings agency anticipates that strong demand for power, transportation, and digital infrastructure will continue to attract significant capital investments in India over the next five to seven years. The impact of US tariffs on most infrastructure sub-sectors is expected to be muted, as they largely cater to domestic demand and benefit from supportive regulatory or contractual arrangements.
While Moody's expresses confidence in India's ability to withstand external shocks, it also acknowledges potential challenges. Sectors such as automobiles, which have some exports to the US, may face global trade headwinds, despite their diversified operations. Moreover, a further deterioration in global economic and credit conditions could have knock-on effects on India. An increase in defense spending could also weigh on India's fiscal strength and slow its fiscal consolidation efforts.
Moody's also addressed the geopolitical risks stemming from tensions between India and Pakistan, suggesting that these conflicts are more likely to impact Pakistan's economy adversely than India's. The major economic centers in India are geographically distant from the conflict zones, and the economic interactions between the two nations remain limited.
Despite these potential challenges, Moody's maintains a positive outlook on India's economic prospects. The agency's assessment suggests that India is well-positioned to navigate the complexities of the global trade landscape and maintain its growth momentum, supported by its strong domestic market, strategic government initiatives, and robust service sector.
