India’s economic fundamentals remain robust, making it one of the most promising growth stories in the emerging markets. Key macroeconomic indicators, including the fiscal deficit, current account deficit, and inflation, are all within manageable limits.
The banking sector remains stable, and household leverage remains under control, providing a solid foundation for sustainable, future growth. These factors put India in a strong position to navigate the complexities of a shifting global economy, offering a beacon of stability in uncertain times.
In the aftermath of the 2024 elections, the country encountered a typical mid-cycle slowdown. This phase was marked by a dip in growth due to reduced government spending and a tightening of consumer credit, especially in urban areas where consumption was one of the drivers of economic expansion.
Whilst the slowdown caused concern, it was a natural part of the economic cycle and India’s growth trajectory remained intact. By November 2024, growth had bottomed out and, thanks to a rebound in government spending and the easing of credit restrictions, the outlook for the country has since brightened, with a better economic growth outlook.
India’s fiscal and monetary flexibility provides a strong foundation for accelerating growth when needed, making it a resilient economy and allowing for swift and strategic interventions to drive the economy.
The Reserve Bank of India (RBI) has already started its rate-cut cycle, and the government has taken significant steps to boost consumption. Personal income tax cuts for the upcoming fiscal year are helping to increase disposable income, stimulating consumption growth and supporting the wider economy.
These measures are expected to catalyse a stronger recovery, with GDP growth projected to reach 6.5-7% in 2026. This recovery will likely fuel earnings growth, which is forecasted to accelerate from a moderate 7-8% in 2025 to a more robust low-to-mid teens over the next few years.
Recent valuations of the country’s top 100 companies have fallen below their 10-year average, presenting a compelling investment opportunity.
With a more attractive price point, investors have an opportunity to capitalise on the country’s long-term growth prospects as corporate earnings catch up with the recovery. Key sectors, including technology, pharmaceuticals, and infrastructure, remain poised for expansion, driven by domestic and global demand.
India’s exposure to external trade risks is another factor in its favour. While many larger economies are grappling with the consequences of geopolitical tensions and rising tariffs, India’s vulnerability is relatively low.
The country’s trade deficit with the US, at $45bn, is far smaller than many other major economies, with a significant portion of the deficit (around 25%) driven by generic pharmaceutical exports. This limited exposure to potential trade barriers provides India with an added layer of resilience in the face of global disruptions.
Looking ahead to the future, India is set for a period of strong earnings growth. Projections suggest that over the next three to four years, corporate earnings will accelerate to the low-to-mid teens, driven by higher government spending, an improved credit environment and a rise in domestic consumption.
The country’s strong demographic trends, combined with a stable macroeconomic environment, will continue.
Overall, the economic outlook remains bright. The country’s fiscal flexibility, pro-growth government policies, attractive valuations and limited exposure to global trade risks make it an increasingly attractive destination for investors.
As it recovers from its mid-cycle slowdown, India is well-positioned to continue its upward growth trajectory, offering significant opportunities in the years ahead.
Murali Yerram is portfolio manager of the Franklin India fund. The views expressed above should not be taken as investment advice.