India’s Economy Holds Up: IMF Raises Growth Forecast Despite US Tariff Pressure

Revised forecast and underlying strengths

In its latest World Economic Outlook report, the IMF raised its projection for India’s real GDP growth in fiscal 2025-26 to 6.6 percent, up by 0.2 percentage points relative to its previous estimate.  This upward revision comes against the backdrop of India posting a robust 7.8 percent growth rate in the April-June quarter — marking the fastest pace among major economies globally. The IMF attributed this resilience to a strong carry-over effect from the first quarter, buoyed by private consumption and investment trends that offset external demand weakness caused by US tariffs.

These strong domestic drivers include a surge in retail sales (up 6.8 percent through July) and fast-moving consumer goods volume growth of 13.9 percent in the second quarter.  Government spending too rebounded, rising 7.5 percent as early disbursements and infrastructure allocations boosted public expenditure. These factors combined to provide a stable growth platform despite global headwinds.

Tariff shock and export headwinds

At the same time, India faces a challenging external environment. The United States began imposing steep tariffs — up to 50 percent on some Indian goods — as part of escalating trade tensions. Analysts estimate the hit to Indian growth could be up to 0.8 percentage points in the current and next year.  The IMF noted that while India remains among the fastest growing economies, persistent disruption, fragmentation and rising trade policy risk are clouding its medium-term outlook.

Despite strong growth in the manufacturing sector, the nominal growth rate (reflecting output at current market prices) fell to 8.8 percent from 10.8 percent, revealing that inflation is moderating but pricing power is under pressure. These dual pressures — external tariff risk and domestic pricing constraints — highlight the fragility beneath India’s strong headline numbers.

Structural reform agenda and domestic engines

A major part of the story of India’s economic resilience lies in its ongoing structural reform agenda. The Deloitte India Outlook notes that three key engines — resilient domestic consumption, investment pick-up, and widening formalisation of the MSME (micro, small and medium enterprise) sector — are driving growth. MSMEs in India contribute nearly 30 percent of GDP, around 45 percent of exports, and provide livelihoods to more than 240 million people, underscoring their central role.

Nevertheless, productivity remains a challenge: currently Indian MSMEs operate at roughly 18 percent of large-enterprise productivity, compared with 45-70 percent in mature economies. Closing that gap through digital adoption, deeper financial inclusion and infrastructure investment will be critical to sustaining broad-based growth.

Consumer strength and urban demand

India’s consumer base remains a key strength. Private consumption grew by 7 percent, supported by tax cuts and steady job creation. Urban demand remains strong, especially for services, digital platforms, e-commerce and mobility. Infrastructure investment is also acting as a stabiliser, with large projects under construction and a renewed focus on global competitive readiness.

Risks ahead and export vulnerability

While domestic dynamics are positive, India’s reliance on exports makes it vulnerable to trade policy shifts, global demand slowdown and supply-chain disruptions. The current US-India trade friction exemplifies this: if trade retaliation escalates, Indian manufacturing and exports could feel pain. The Business Standard noted the headwinds for India in 2026 could increase given external demand weakness and policy uncertainty.

Industrial output growth has moderated to around 4 percent in September, signalling that manufacturing requires further stimulus. Inflation remains low, but deflationary pricing pressure may reduce corporate margins and deter investment. The combination of these factors could dampen business sentiment; indeed the BCI (Business Confidence Index) for MSMEs saw only marginal rise from 137.1 to 138.2 in recent reporting.

Investment flows and capital markets

Foreign direct investment (FDI) and domestic investment both play a role. On one hand, the sovereign credit rating upgrade of India by S&P Global Ratings to “BBB” (from “BBB-”) reflects improved creditworthiness and could attract more capital inflows.  On the other hand, global capital markets are volatile, and India must balance growth ambitions with stability, especially as emerging markets face moderating prospects.

Policy responses and government stance

The government has responded proactively, emphasising consumption support, boosting infrastructure spending and focusing on digital ecosystems (such as UPI, database reforms, MSME formalisation). At the same time, policymakers are mindful of external risks: the statements by S. Jaishankar emphasising India’s national-interest posture on trade reflect a strategic clarity in dealing with external pressures.

Additionally, the central bank and finance ministry are likely to maintain an accommodative monetary stance while ensuring inflation remains well-anchored. According to Deloitte, this macro-framework underpins investor confidence in India’s medium-term growth story.

Sectoral implications: manufacturing, services, exports

Manufacturing is at a critical juncture: the sector grew strongly but is facing structural bottlenecks. The rise in manufacturing PMI and factory output earlier this year was encouraging, but the moderation to ~4 percent in industrial output in September signals uneven momentum. Services remain a stronger pillar, with India benefitting from domestic demand and digitalisation. Yet, the risk of falling into a “low-wage job trap” remains real, particularly if jobs created in services are informal or low quality.

Exports are grappling with weak global demand and tariff pressures. The policy focus on import-substitution, regional value-chains (such as “Make in India 2.0”), and strategic sectors (semiconductors, green energy) is meant to build resilience. The recent conference remarks by Prime Minister Narendra Modi, where he emphasised that India performed beyond every expectation despite “economic selfishness” abroad, illustrates this strategic tone.

Regional growth and state-level dynamics

While national numbers look strong, state-level disparities remain. Some states have leveraged digital infrastructure, logistics improvements and governance reforms better than others. The formalisation of MSMEs has progressed faster in certain states, but bridging productivity gaps is still an area of concern. As India moves towards its aspirational status of the world’s third-largest economy (per PM’s remarks), regional convergence will be a key test.

Global comparisons and emerging market context</ >

India’s out-performance is notable: unlike many emerging markets facing contractions, India continues to expand. The World Bank underscores India as a growth outlier. However, the global economy is projected to weaken in 2026 and beyond, with emerging markets collectively forecast to grow slower — a warning sign for India’s export-heavy segments.

Outlook and what to watch

Key variables to monitor include:

• Export growth and tariff policy developments with key partners such as the US and EU.
• Manufacturing output and investment as signals for non-consumption growth.
• Productivity improvements in MSMEs and their digital/financial adoption.
• State-level reforms and infrastructure deployment.
• Global economic health and demand for Indian goods and services.

If India can maintain consumer momentum, accelerate investment and build stronger export resilience, it could continue to lead among major economies. Conversely, a global demand slump or escalation of trade wars could dampen growth significantly.

Conclusion

Despite facing substantial external headwinds, India’s economy is holding up impressively, underpinned by strong domestic demand, structural reforms, resilient investment and consumption. The IMF’s upward revision of India’s growth forecast to 6.6 percent in FY2025-26 is a testament to this resilience. Yet, the export vulnerability, manufacturing bottlenecks and global uncertainty remain clear. For India to convert its growth into sustainable prosperity, the focus must shift to inclusive productivity, global competitiveness and domestic structural depth. The current moment offers both opportunity and caution — the next few quarters will reveal whether India can transform its momentum into enduring economic strength.