IMF Projects Robust 6.6% Growth for India in FY26 Despite Global Challenges and US Tariffs

The International Monetary Fund has expressed confidence in India's economic outlook, supporting the Reserve Bank of India's data-driven monetary policy approach.

Washington:

India's economic growth is projected to remain strong in FY26 despite external challenges, buoyed by favorable domestic conditions, according to an IMF report released Wednesday.

The report forecasts India's real GDP to grow at 6.6 percent in FY2025-26 under the baseline scenario of continued 50 percent US tariffs, before moderating to 6.2 percent in FY2026-27.

India's economy continues to demonstrate resilience. Following 6.5 percent growth in FY2024-25, the economy expanded by an impressive 7.8 percent in Q1 of FY2025/26. Headline inflation has decreased significantly, primarily due to subdued food prices. The financial and corporate sectors maintain strong resilience, with adequate capital buffers and multi-year low non-performing assets. The report also noted progress in fiscal consolidation and a well-contained current account deficit, supported by resilient service exports.

The IMF highlighted that reforms to the goods and services tax (GST) and the resulting effective rate reduction are expected to help mitigate the adverse impact of tariffs. Headline inflation is forecast to remain well controlled, reflecting both the one-off effect of GST reform and continued benign food prices. The report suggests that India's ambition to achieve advanced economy status can be bolstered by implementing comprehensive structural reforms to enable higher potential growth.

The economic outlook faces significant near-term risks. On the positive side, new trade agreements and faster implementation of domestic structural reforms could boost exports, private investment, and employment. Conversely, further deepening of geoeconomic fragmentation could lead to tighter financial conditions, higher input costs, and reductions in trade, foreign direct investment, and economic growth. The report also warned that unpredictable weather events could affect crop yields, adversely impacting rural consumption and potentially reigniting inflationary pressures.

IMF Executive Directors have commended India's strong economic performance and resilience, attributing these strengths to sound macroeconomic policies and reforms. Given the high uncertainty, they advocated for continued sound policies and emphasized that accelerated implementation of structural reforms will be crucial for maintaining stability and supporting India's ambition to become an advanced economy.

The IMF has aligned with the government's plans for continued fiscal consolidation this year, while noting that achieving the fiscal deficit target will require strong spending discipline. While welcoming the recent simplification of GST, they recommended careful monitoring of the fiscal impact resulting from reductions in GST and personal income tax rates.

The Fund has expressed support for the RBI's data-dependent approach to monetary policy. They generally indicated that if tariffs persist at current levels, there would likely be room for further monetary easing amid favorable inflation dynamics. The IMF broadly recommended continued efforts to enhance monetary transmission and greater exchange rate flexibility to help the Indian economy absorb external shocks, with interventions aimed at addressing disorderly market conditions consistent with the Integrated Policy Framework.