India’s economy is expected to remain on firm footing this year despite the drag from steep US tariffs, supported in part by the recent reduction in the goods and services tax (GST), the International Monetary Fund (IMF) has said in its latest staff appraisal. The assessment, released on November 26, notes that while the 50 percent tariff imposed by the United States in August will weigh on external demand, the overall impact on the Indian economy is likely to be manageable because merchandise exports form a relatively small share of GDP.
“The imposition of the 50 percent U.S. tariffs in August will weigh on the outlook, but the magnitude is expected to remain manageable as India has relatively limited exposure to merchandise exports,” IMF staff said in the report. They added that domestic economic conditions remain supportive, with growth momentum holding firm and inflation staying benign.
The IMF projected Indian economy to grow 6.6 percent in FY26 and 6.2 percent the following year. Inflation is expected to decline to 2.8 percent this fiscal, but pick up to 4 percent next fiscal.
The report commends India’s progress on the fiscal front but urged the government to pursue a more ambitious consolidation path.
While acknowledging that New Delhi has maintained spending discipline and continued to reduce its deficit, the IMF recommended that India “expand the fiscal consolidation roadmap” and adopt more aggressive medium-term targets.
According to the staff appraisal, the current combination of high public debt and global uncertainty warrants stronger buffers.
On the upside, the IMF cited the possibility of India concluding new trade agreements and accelerating structural reforms, which could lift exports, private investment and employment. On the downside, it warned that deeper geoeconomic fragmentation could tighten global financial conditions and raise input costs, pulling down foreign direct investment and growth. Weather-related volatility remains another concern the IMF noted.
Despite these uncertainties, the IMF reaffirmed that India’s macroeconomic fundamentals remain strong. The GST reform — which lowers the effective tax rate and simplifies compliance — is expected to cushion households and support consumption over the coming quarters. However, it noted that the impact of GST rationalisation and income tax cuts on fiscal consolidation needed monitoring.
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