India's economy has seen a mix of positive developments and emerging challenges in recent days. A significant boost to investor confidence came with S&P Global's upgrade of India's sovereign credit rating to 'BBB' from 'BBB-', with a stable outlook. This upgrade, the first in nearly two decades, reflects the nation's robust economic fundamentals, disciplined fiscal management, and effective monetary policies. It is anticipated to reduce sovereign borrowing costs and attract higher foreign capital inflows, fostering a more stable environment for public and private investments.
In a major policy move, Prime Minister Narendra Modi announced sweeping changes to the Goods and Services Tax (GST) regime, signaling a potential rationalization of tax slabs. The proposed reforms aim to reduce the cost of daily essentials and electronics, thereby bolstering domestic consumption. The government is confident of meeting its fiscal deficit target of 4.4% for the current fiscal year despite these planned tax cuts, with a new-generation GST reform expected to be launched by October 2025.
Despite these positive internal developments, the Indian markets experienced significant foreign portfolio investor (FPI) outflows. In the first half of August alone, FPIs offloaded over Rs 21,000 crore from Indian equities. Analysts attribute these outflows to factors such as US tariffs on Indian goods, lackluster first-quarter corporate earnings, and a weakening rupee.
The imposition of a 50% tariff by the United States on Indian goods has emerged as a major concern. Experts are divided on the exact impact, but sectors such as textiles, auto components, agriculture, and gems and jewellery are deemed most vulnerable, with potential job losses affecting hundreds of thousands, particularly in Micro, Small, and Medium Enterprises (MSMEs). Trade talks between India and the US, initially planned for late August, are likely to be postponed amidst these tariff disputes.
On a more positive note, the rural economy is showing early signs of a broad-based recovery. This resurgence is attributed to a strong start to the monsoon season, a rebound in rural wages driven by easing inflation, and increased government spending on infrastructure. Furthermore, Prime Minister Modi inaugurated significant infrastructure projects in the Delhi-NCR region, including sections of the Dwarka Expressway and Urban Extension Road-II, valued at approximately ā¹11,000 crore, aimed at easing traffic congestion.
Looking ahead, Union Bank of India projects that India's current account deficit (CAD) may nearly double to 1.2% of GDP in FY26 from 0.6% in FY25, influenced by evolving trade dynamics and global commodity prices. However, the bank expects the CAD to remain manageable due to a strong invisible surplus.