India outlook 2025: Imminent recovery, compelling long-term prospects

The structural growth outlook for India’s economy remains very much intact in our view, with various signs indicating that the slowdown in 2024 will be transitory. We expect the growth momentum to improve entering 2025, as government spending picks up again and consumer sentiment stays resilient. This should enable better earnings growth, amid an improving economic backdrop that may also find support from favorable monetary and fiscal policies.
We believe India will continue to stand out as the fastest-growing major economy globally in the coming years. In this environment, the premiumization of consumption remains a high-conviction theme for Franklin Templeton Emerging Markets Equity (FTEME). We also stay positive on India’s vibrant digital economy and its beneficiaries, as well as the structural growth potential in the health care sector.
Temporary slowdown, but recovery in place
India’s economic growth slowed in 2024, with gross domestic product (GDP) year-on-year growth of just 5.4% in the fiscal second quarter (July-September), the lowest in seven quarters. As a result, growth for the full fiscal year ending March 2025 will likely be 6.6%,1 moderating from 8.2% from a year earlier, based on Reserve Bank of India (RBI) forecasts.
We believe this slowdown is temporary, with deferred government spending in a general election year the primary cause. Heavy monsoon rainfall during the summer also proved disruptive to economic activities. In our view, several high-frequency datapoints are showing improving underlying conditions for a recovery in growth:
Government spending is picking up: Government cash balance—a major indicator for government spending—dropped to a deficit of INR458 billion (US$5.4 billion) in the first week of December.2 This figure has been on a downtrend since September, suggesting that the government is gradually ramping up its spending on priority initiatives, particularly infrastructure and rural development. Importantly, a pickup in government spending and activities should synergize capital expenditure (capex) growth in the private sector. For instance, we may see faster approvals for construction and engineering projects, bolstering company confidence to invest and hire more actively.
Domestic demand remains healthy: Private consumption is a major driver for India’s economy and it is showing stronger growth momentum in the second half of this year. Consumer sentiment also remains resilient and year-ahead optimism has held firm, indicating a post-election recovery. Consumption growth should find further support if inflation cools in 2025. The Consumer Price Index (CPI) inflation rate will moderate from 5.7% in the October-December quarter of 2024 to 4% in the July-September quarter of 2025, based on RBI forecasts.
The resumption of government spending, private sector capex growth and the resilience of domestic consumption, among other factors, may help India’s economy return to normalcy in 2025. As growth accelerates again, the stage is set for earnings recovery.
Earnings growth recovery and policy factors
Indian equities, as represented by the Nifty 50 benchmark, are likely to see high-single-digit earnings growth in the current financial year ending March 2025, declining from the high-teen level growth seen in the previous financial year. This is due to sharp earnings cuts particularly in the energy, industrials and consumer staples sectors. However, we believe corporate earnings growth will accelerate to a mid-teen level in the next financial year, in line with India’s economic recovery. The current consensus forecast puts Nifty 50 earnings-per-share (EPS) growth at 14.7% for the financial year ending March 2026.
The recovery of domestic private consumption and government spending should drive the improvement of India’s economic momentum. These are also key factors that should catalyze a reacceleration in corporate earnings growth.
A third factor that we are monitoring is the tailwind arising from stable inflation and a favorable fiscal policy position. These trends may lead to interest rate cuts in 2025, especially given the moderation of CPI inflation towards the 4% target rate. As for fiscal policies—we note that the government’s focus on lowering fiscal deficit may limit policy flexibility, but additional measures to spur growth recovery in 2025 cannot be ruled out.
We are monitoring whether the government will table further personal income and corporate tax benefits in its FY26 budget (out in February 2025). Any such announcements will add on to the stimulative policies rolled out in the current financial year. For instance, the FY25 budget includes targeted tax cuts and increased deductions for employees, the value of which is estimated to be US$210 per annum per salaried worker, with a focus on middle-income employees. Meanwhile, an income transfer scheme that offers a minimum monthly income to women in selected states also bears watching. If broadened to more states or even to a national level, this scheme should further strengthen consumption, to the benefit of the overall economy.
We remain mindful of external headwinds; the tariff hikes US president-elect Donald Trump has proposed represent a key risk to consider. At this stage, we expect the impact of higher US tariffs to be manageable. Among the major Indian exports,4 electrical and electronic equipment—which in 2023 accounted for US$9.89 billion or 13% of total exports to the United States—may take a larger hit. However, this risk is global and not specific to India. Other major US-bound exports, such as precious stones and metals (13.4% of total) and pharmaceutical products (10% of total) face limited competition from other markets. Hence, these products should prove resilient even if they are subject to higher US tariffs, as they have relatively inelastic demand, enabling them to pass through higher costs. Meanwhile, we are cognizant of the possibility that the US tariff hikes may be uneven among countries, with certain countries facing higher levels than others. India may benefit from this differential.
Long-term growth prospects and high-conviction themes
As economic and earnings recovery takes shape in 2025, we reiterate our confidence that India’s long-term growth prospects remain strong and firm.
The country should continue to benefit from the political stability and socioeconomic reforms under the Bharatiya Janata Party (BJP)-led government. Broad-based infrastructure and manufacturing investments should remain a priority for the country as it aims to become a vibrant industrialized economy that sits at the heart of global supply chains. These developments have joined domestic consumption to lay a solid foundation for self-sustaining economic growth.
All in all, we believe India can comfortably maintain its position as the world’s fastest-growing major economy, with GDP growth of around 6.5% until at least 2029 (Exhibit 4). Income growth and the rise of the middle class will likely continue in tandem. We expect India’s wealthy and middle-class populations to expand by 400 million people. In particular, the number of people in India’s wealthiest class could grow three-fold.
Against this backdrop, we maintain a high conviction in themes associated with consumption, digitalization and health care, among other ideas:
Consumption and premiumization: Domestic consumption remains the key to both near-term recovery and long-term prospects of India’s economy. A confluence of macro factors place consumers at the driver’s seat of India’s growth. Favorable demographics—characterized by a larger proportion of younger people—have combined with sustained income growth to spur demand for goods and services, with consumers increasingly willing to fork out for more premium offerings. We see this in the structural increase of discretionary spending (Exhibit 5) as part of Indians’ wallet share, relative to essential products. Notably, the consumer discretionary sector may see compounded annual earnings growth (CAGR) of 17.3% between financial year 2024 and 2026—the highest across all sectors.
Digitalization and technology: A conscious policy push for digital transformation forms another key part of India’s growth engine. This is driving multi-year investment opportunities across a broad range of goods and services providers, from online retail and food ordering to information technology (IT) consulting and outsourcing. Workforce growth, government support and infrastructure development support the IT landscape in the country. Investments in artificial intelligence and automation may drive further demand for India’s technology expertise.
Health care: In our view, the health care sector is also part of India’s consumption growth story, similarly benefiting from rising income levels as well as demand for higher-quality services and lifestyles. We expect to see increased health care spending in India, potentially supporting the expansion of hospital chains and local specialty drug production. In particular, hospital operators are well positioned to capture the structural opportunities stemming from India’s shortage of hospital beds. A low hospital bed density (Exhibit 6) implies considerable untapped demand and a long runway for capacity expansion, which should underpin long-term market growth. In the near term, the health care sector is expected to see earnings CAGR of 16.9% in FY24-26, the second highest among all sectors.
Source: Franklin Templeton