Economic Activity Holds Up Despite Turbulence; Consumption Softens 

Economic activity in India held up in April despite geopolitical turbulence and escalating military tensions on the country’s western border. However, there were signs of some weakening in consumption demand. 

The financial year got off to a tumultuous start, with US President Donald Trump announcing reciprocal tariffs on all major economies, only to suspend them within a week for all countries except China. The US and China have also reached an agreement, suspending the retaliatory tariffs on each other. 

Even as global trade war unfolded, India was grappling with a different crisis - the prospect of an actual war. Tensions flared up on India’s western border after terrorists attacked tourists in Kashmir, leaving 26 people dead. The situation reached a flashpoint in early May when India conducted precision strikes on terrorist infrastructure inside Pakistan and Pakistan-Occupied Kashmir. Just as the skirmishes threatened to escalate into a full-blown conflict, both sides agreed to a ceasefire after four days of drone and missile exchanges targeting military installations on both sides.

Sound Footing
Despite the turbulence on the external front, the Indian economy continued to show resilience. Government revenues and domestic trade performed well in April. Goods and Services Tax collections hit a record ₹2.367 trillion, up 12.6% year-on-year — the fastest growth in 17 months. E-way bills, a proxy for domestic trade, rose 23.4% from a year earlier to 119.27 million, the fastest pace in 18 months. In absolute terms, April saw the second highest number of e-way bills in a single month, indicating buoyant GST collections for May as well.

Purchasing managers’ indices also pointed to an uptick in economic activity, albeit a modest one. The manufacturing PMI edged up slightly to 58.2 in April, the highest in 10 months. With a marginal improvement in the services PMI, the composite PMI rose to 59.7 — its highest level in eight months. All three PMIs remained well above their long-run averages of around 54.

Growth in passenger vehicle sales remained weak but improved slightly, rising to 3.9% in April from 1.9% a month earlier, driven primarily by double-digit growth in utility vehicles. 

Disquieting Trend
However, early signs of a slowdown in consumer demand — especially in rural areas — began to emerge. Sales of tractors and two-wheelers, considered proxies for rural demand, moderated sharply in April.

Tractor sales growth slowed to 7.7% in April from 25.4% in March, as the low-base effect from previous months began to diminish. Over the past four months, tractor sales had averaged 21.4% growth, largely due to favourable base effects.

Two-wheeler sales declined sharply, falling 16.7% year-on-year to 1.459 million units in April — the steepest contraction in over three years. Motorcycle sales dropped 22.7% to 871,666 units, while scooter sales fell 5.7% to 548,370 units.

Passenger car sales also continued to slump, declining 5.4% from a year earlier. Over the past two years, monthly car sales have declined year-on-year in 22 out of the 24 months. To put this in perspective, April’s passenger car sales were 35% lower than despatches in April 2021.

Electricity generation contracted 2.0% year-on-year in April, marking the steepest decline in seven months. As the largest single component in the Index of Industrial Production, this decline is likely to weigh on April’s factory output. Industrial production had grown 3.0% in March.

The government has released its first monthly bulletin of the Periodic Labour Force Survey, reporting an unemployment rate of 5.1% in April. A comparable figure will be available only after the May data is published next month. The last released figure was 4.9% for the full year 2024–25, but this may not be directly comparable due to a change in the survey's data collection methodology.

Trump Effect
Trump’s tariff measures seem to have impacted external trade. India’s merchandise exports rose at their fastest pace in six months in April, partly on account of frontloading ahead of the proposed reciprocal tariffs by the US. Exports rose 9.0% year-on-year to $38.49 billion, with shipments to the US jumping 27.3% to $8.42 billion.

Merchandise imports in April at more than twice the pace of exports, pushing up trade deficit to a five-month high of $26.42 billion. Imports rose 19.1% year-on-year to $64.91 billion, the third highest monthly figure ever.

Softer Inflation
There was good news on the inflation front. Retail inflation eased to a 69-month low of 3.16% in April, driven primarily by a continued moderation in food prices. Food inflation fell to 1.78%, down sharply from a 15-month high of 10.87% in October. 

This marks the third consecutive month that headline inflation has remained below the Reserve Bank of India’s medium-term target of 4.0%. CPI inflation is currently trending well below the RBI’s forecast of 3.6% for the Apr-Jun quarter. With a high base effect persisting through most of 2025, inflation is likely to remain benign unless food prices spike. 

The sustained moderation in price levels has strengthened expectations of further rate cuts by the Monetary Policy Committee, with some market participants anticipating another 100 basis points of rate cuts in the current easing cycle.

However, core inflation has been creeping up. At 4.1%, core inflation remained above the headline inflation for the third consecutive month in April. The last time core inflation was higher than headline inflation was in June 2023.

Market Boost
Trump’s climb-down on tariffs, the ceasefire agreement between India and Pakistan, and surplus liquidity in the banking system helped lift sentiments in financial markets. Indian equity benchmarks appeared poised for a third consecutive month of gains in May.

As of mid-May, the benchmark Nifty 50 was 3.0% higher than at the end of April and up 6.5% so far in the current financial year. 
With abundant liquidity in the banking system and the Reserve Bank of India in an easing cycle, government bond yields fell to multi-year lows. The yield on the 10-year benchmark stood at 6.27% as of May 15, a three-and-a-half year low.