IMF forecasts 6.6% growth for India in 2026 despite US tariff pressures

India’s economy is expected to grow 6.6 per cent in 2025-26 despite prolonged US tariffs and global uncertainty, the International Monetary Fund said in an annual assessment released this week. The IMF believes reforms to the Goods and Services Tax will help soften the impact of the 50 per cent tariffs imposed by Washington.

The IMF said India “has continued to perform well,” noting that GDP expanded 7.8 per cent in the first quarter of FY2025-26 after full-year growth of 6.5 per cent in the previous fiscal. The Fund expects growth to moderate slightly to 6.2 per cent in FY2026-27 under the assumption that elevated tariffs remain in place.

Despite external headwinds, the IMF said favourable domestic conditions would continue to support activity. It argued that India’s ambition to become an advanced economy will hinge on advancing structural reforms that lift potential growth.

The Fund said GST simplification and a reduction in the effective tax rate would help cushion the tariff burden, including those linked to India’s purchases of Russian energy. It also highlighted risks to the outlook, ranging from deepening geoeconomic fragmentation to weather-related shocks that could depress farm output, hurt rural consumption and reignite inflation.

Inflation is projected to stay contained. The IMF said headline inflation had “declined markedly” due to subdued food prices and one-off effects from the GST reform. It added that India’s financial and corporate sectors remain resilient, supported by adequate capital buffers and multi-year lows in non-performing assets. Fiscal consolidation has progressed, and the current account deficit has been limited by robust services exports.

IMF Executive Directors commended India’s macroeconomic management and resilience. They backed plans for ongoing fiscal consolidation but said meeting deficit targets would require strict spending discipline. Directors also welcomed GST simplification while calling for close monitoring of its fiscal impact, including on personal income tax receipts.

The Board recommended that any tariff relief be targeted and temporary, and that future fiscal consolidation be calibrated to the economy’s output gap under continued tariff pressure. Over the medium term, the IMF urged India to rebuild fiscal buffers through stronger domestic revenue mobilisation and more efficient public spending, including targeted social support. Strengthening state-level finances and monitoring contingent liabilities were also flagged.

On monetary policy, Directors said benign inflation dynamics could create space for further easing if tariffs persist. They encouraged improvements in monetary transmission and greater exchange-rate flexibility to help absorb external shocks, noting that foreign-exchange interventions should aim only to counter disorderly market moves.

The IMF said India’s long-term development will require comprehensive structural reforms. It called for deeper trade integration, higher investment in research and innovation, stronger human-capital development, greater female labour participation and continued progress on labour-market reforms. The Fund also highlighted the importance of a well-managed green transition supported by concessional financing.

India’s financial system, the IMF said, remains sound but requires ongoing vigilance. Directors encouraged the authorities to address vulnerabilities in non-bank financial firms, monitor rising interconnectedness and advance structural reforms in the financial sector.