India's GDP grew by 7.8% year-on-year in the second quarter, reaching a new high in over a year, but the shadow of tariffs looms over future prospects

India has announced stronger-than-expected economic growth data, achieving the fastest growth rate in over a year, but recent actions by U.S. President Trump to impose high tariffs on Indian goods have cast a heavy shadow over future economic prospects.

According to data released by the Indian Ministry of Statistics on Friday, India's GDP grew by 7.8% year-on-year in the second quarter, significantly higher than economists' expectations of 6.7%, and also surpassing the 7.4% growth rate in the first quarter of this year. Following the data release, market focus shifted to the sharp deterioration of the external trade environment.

According to CCTV News, on August 25 local time, the U.S. Department of Homeland Security issued a notice proposing to impose a 50% tariff on Indian goods starting at midnight on August 27. The notice stated that the tariffs would apply to "all imported Indian goods for consumption or storage for consumption." Due to market concerns that U.S. tariffs will harm India's economic growth and corporate profits, the Indian rupee fell to a historic low against the U.S. dollar. On Friday, the Indian rupee briefly fell 0.8% against the dollar to 88.26, becoming the worst-performing currency in Asia this year.

Analysts believe that the better-than-expected growth is partly due to exporters ramping up shipments to the U.S. before the tariffs take effect in August, while the full impact of the high tariffs is expected to manifest in the coming months, potentially putting chain pressure on India's exports, employment, and domestic consumption.

Tariff Shockwaves Affecting the Market

The latest escalation of trade policy by the Trump administration has brought significant uncertainty to investors. Previously, economists at Citigroup estimated that this round of tariffs could reduce India's annual growth rate by 0.6 to 0.8 percentage points. Madhavi Arora, an economist at Emkay Global Financial Services Ltd., stated:

"The macro shock of the 50% tariff will begin to transmit through exports and have a domino effect on employment, wages, and private consumption. This could further suppress the outlook for private investment and hinder growth."

Despite the tariff threat, the growth data from the previous quarter remains solid. The data shows that India's manufacturing and construction sectors accelerated growth, service sector spending was strong, and both government and private spending also picked up pace.

Economists point out that this strong performance may be partly due to a short-term factor: ahead of the initial 25% tariffs imposed by the Trump administration in August, Indian exporters rushed to ship goods to the U.S., boosting export performance.

India's Government Response Strategies

Although the U.S. is India's largest export market, bilateral trade accounts for only about 2% of India's GDP. To offset the impact of the tariffs, Prime Minister Modi's government is taking measures to stimulate private consumption, which accounts for about 60% of GDP.

Earlier this month, Modi announced a plan to cut consumption taxes, which may take effect in October, aimed at boosting consumer spending and helping to curb prices IDFC First Bank estimates that the tax reduction measures are expected to boost the nominal GDP growth rate by 0.6 percentage points within 12 months.

The acceleration of economic growth in the previous quarter may provide the Reserve Bank of India (RBI) with more reasons to maintain interest rates at current levels for a longer period. So far this year, the Indian central bank has cut interest rates by a cumulative 100 basis points but chose to hold steady at the most recent policy meeting.

Gaurav Kapur, an economist at IndusInd Bank Ltd., believes:

“The cumulative monetary stimulus, easing inflation, strong service sector activity, and the planned rationalization of the Goods and Services Tax (GST) will help offset the external drag caused by tariffs.”

He stated that the latest data indicates that India's economic growth rate is still expected to remain around 6.5% for the year