India’s economy grew at an annual rate of 7.8% in the quarter ending June, topping economists’ expectations of 6.7% (Reuters poll), as quoted on CNBC. The growth was driven by decent performances in manufacturing (7.7%), services (9.3%), and construction (7.6%) sectors.

Despite the upbeat real GDP print, economists pointed to a slowdown in nominal GDP, which slipped to 8.8% in April–June from 10.8% in the prior quarter.

According to Anubhuti Sahay, head of Indian economic research at Standard Chartered, softer deflators or the inflation-impact have brightened real GDP growth, as quoted on the above-mentioned CNBC source.

Inside Headwinds

India faces external challenges as the U.S. imposed 50% tariffs on Indian imports starting Wednesday. Among sectors most likely to be hit, include textiles, sea food, and gems and jewelry. Economists expect this trade measure to weigh on growth in the coming quarters. Meanwhile, the Indian rupee weakened to a record low sharply.

How is India Planning to Manage U.S. Tariffs?

Indian exporters are exploring other markets amid steep U.S. tariffs. Textile companies like Gokaldas Exports, Welspun Living, KPR Mill, Indo Count Industries, generate about 20% to 70% of their revenues from the U.S. markets, as quoted on CNBC.

U.S. trade measures are pushing China and India closer, with India’s electric vehicle sector likely to benefit from stronger ties with China. China may also gain from greater access to the Indian market, as quoted on CNBC.

However, the relationship continues to remain under pressure by India’s widening trade deficit and long-standing border tensions with China.China’s close relationship with Pakistan is another painful point for India.

Meanwhile, India is trying to establish itself as a global manufacturing hub for companies those are seeking to diversify supply chains away from China (again due to trade tensions between the United States and China).

In fact, India topped China as the largest smartphone supplier to the United States in the second quarter, while China’s share of U.S. smartphone imports dropped to 25% from 61% a year earlier, according to research firm Canalys, as quoted on CNBC. India’s sudden rise as a smartphone supplier to the United States may not be well-received by China.

Indian Rate Cuts in the Cards?

To counter potential growth risks, the Reserve Bank of India cut its policy rate to 5.5% in June with a 50 basis-point reduction. While the central bank left rates unchanged in August, analysts suggest further cuts are likely, if growth momentum eases.

India’s AI Push

Indian behemoth Reliance Industries’ Chairman Mukesh Ambani on Friday revealed new artificial intelligence partnerships with Google and Meta. Reliance will use Google’s AI and cloud technologies to drive innovation across sectors like energy, retail, telecommunications, and financial services.

Moreover, the company is forming a joint venture with Meta to deploy the tech giant’s open-source AI models and develop “sovereign, enterprise-ready AI for India,” as quoted on CNBC.

ETFs in Focus

Against this backdrop, India-based exchange-traded funds (ETFs) likeColumbia India Consumer ETF (INCO Quick QuoteINCO - Free Report) , Matthews India Active ETF (INDE Quick QuoteINDE - Free Report) , The India Internet ETF (INQQ Quick QuoteINQQ - Free Report) , and First Trust India NIFTY 50 Equal Weight ETF (NFTY Quick QuoteNFTY - Free Report) deserve a special attention.

These ETFs are caught between decent growth prospects and trade-related risks. However, note that tariffs affect some particular sectors, not all. In such a scenario, if India comes up with rate cuts, the market may get energized.

Moreover, if trade tensions ease or India finds ways to handle the impact of tariffs, the country’s decent growth outlook could strengthen the case for investing in India. But for now, each development needs to be monitored closely.