The International Monetary Fund (IMF) anticipates robust growth for India, projecting its GDP to expand by 6.6 percent in the current fiscal year (FY26) before moderating slightly to 6.2 percent in the subsequent year. This slowdown is directly linked to external headwinds from continued US tariffs, which are anticipated to “dent external demand and investment”. The imposition of 50 percent US tariffs on India’s merchandise exports, effective since August, has sharply raised the average effective tariff rate to 37.8 percent.
In its latest 2025 Article IV Consultation report, the international body states that despite external economic pressures, inflation is expected to remain “subdued” and projected at 2.8 percent in FY26. It is, however, likely to rise to 4 percent in FY27. Core inflation is expected to average 3.5 percent this fiscal.
The growth forecasts are driven largely by strong domestic fundamentals. The report states that sound policy decisions and structural reforms, such as the Goods and Services Tax (GST), a flexible inflation targeting regime, and expansion of digital public infrastructure provide the essential stability for sustained economic expansion. It also notes that the rate rejig “will reduce the compliance burden and should help broaden the tax net”.
On the upside, the report suggests new trade agreements and accelerated domestic structural reforms could fuel exports, private investment, and job creation. Conversely, the downside risks are notable: A further “escalation of global trade tensions” and “geoeconomic fragmentation” could trigger tighter financial conditions, higher input costs, and a drop in trade, foreign direct investment (FDI), and economic output. Additionally, a slump in household confidence due to factors like stock market volatility or restricted bank lending could be a risk to private consumption. Finally, unpredictable weather patterns introduce uncertainty to crop yields, rural consumption, and food inflation.
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The report further adds that consolidation efforts must focus on cutting back recurrent spending and maintaining robust capital expenditure as a priority. While tariffs are high, “targeted, temporary and time-bound” support should be provided to affected workers and industries to protect households and prevent mass bankruptcies.
The report is not without cautionary notes. The IMF urges India to pursue further revenue-enhancing measures and streamline current spending to meet developmental needs. A critical recommendation is to make the medium-term debt-GDP target “more ambitious” following the rebasing of GDP next year.
