India’s economy to expand 6.6% in FY26 as GST offsets US tariff impact: IMF

India’s economic growth is expected to remain firm despite external pressures, with the International Monetary Fund (IMF) projecting a 6.6 per cent expansion in 2025-26 and stating that the Goods and Services Tax reform is likely to help cushion the adverse impact of the 50 per cent tariffs imposed by the US.

The IMF, in a statement following the completion of its Executive Board’s annual assessment for India, said, “India’s economy has continued to perform well. Following the economic growth of 6.5 per cent in fiscal year 2024/25, real GDP expanded by 7.8 per cent in the first quarter of fiscal year 2025/26.”

It added that India’s ambition to become an advanced economy can be supported by advancing comprehensive structural reforms that enable higher potential growth. Despite external headwinds, growth is expected to remain robust, supported by favourable domestic conditions.

Under the baseline assumption of prolonged 50 per cent US tariffs, real GDP is projected to grow 6.6 per cent in FY2025/26 before moderating to 6.2 per cent in FY2026/27. The GST reform and the reduction in the effective rate are expected to help cushion the adverse impact of tariffs. The US has imposed 50 per cent tariffs on India, including 25 per cent for its purchases of Russian energy.

The IMF flagged significant near-term risks to the outlook. On the upside, new trade agreements and faster domestic implementation of structural reform could boost exports, private investment and employment. On the downside, deeper geoeconomic fragmentation could lead to tighter financial conditions, higher input costs, and lower trade, FDI and growth. Unpredictable weather shocks could affect crop yields, rural consumption and inflation.

Headline inflation is projected to remain well contained, reflecting the one-off effect of the GST reform and continued benign food prices. The IMF said, “Headline inflation has declined markedly, driven by subdued food prices.”

It noted that the financial and corporate sectors have remained resilient, supported by adequate capital buffers and multi-year low non-performing assets. Fiscal consolidation has advanced and the current account deficit has been contained, supported by resilient service exports.

IMF Executive Directors commended India’s strong economic performance and resilience, supported by sound macroeconomic policies and reforms. They called for continued sound policies amid high uncertainty and said accelerated implementation of structural reforms will be critical to support India’s ambition of becoming an advanced economy.

They concurred with the authorities’ plans for continued fiscal consolidation this year, noting that achieving the fiscal deficit target will require strong spending discipline. While welcoming the simplification of the GST, they called for careful monitoring of the fiscal impact from the reduction in GST and personal income tax rates.

The Directors recommended that tariff relief measures should be targeted, transparent and time-bound, and said the pace of fiscal consolidation in FY2026/27 should be linked to the impact of tariffs on the output gap.

For the medium term, they said fiscal buffers should be replenished through domestic revenue mobilisation and more efficient expenditure, including a more targeted social safety net. Enhancing fiscal sustainability at the state level and monitoring contingent liabilities were also highlighted.

The Directors said that if tariffs persist at current levels, there would likely be scope for further monetary easing amid benign inflation dynamics. They recommended continued efforts to enhance monetary transmission and greater exchange rate flexibility to help the economy absorb external shocks, with interventions aimed at addressing disorderly market conditions.

The IMF stressed that comprehensive structural reforms are critical for India’s economic development. Directors welcomed recent labour market reforms and encouraged the authorities to enhance human capital and female labour force participation, continue the public investment push and strengthen the business environment.

They said that deeper trade integration can bolster competitiveness and attract FDI, while investment in R&D and innovation will support productivity-driven growth. Advancing the green transition with greater access to concessional financing was also identified as important for sustainable and resilient growth.

Directors said India’s financial system remains sound with strong capital and liquidity positions. They encouraged authorities to mitigate vulnerabilities among nonbank financial institutions, monitor risks from concentration and rising financial interconnectedness, and make further progress on financial structural reforms.

(With inputs from agencies)