Despite a strong 7.8 percent growth rate in the first quarter, the Indian economy is expected to grow at 6.5 percent this fiscal year as the impact of US tariffs on Indian exports reduces prospects, particularly in the second half, according to ADB on Tuesday.
Key Highlights
- ADB lowers India's FY26 GDP growth forecast to 6.5% from 7% due to US tariff impacts.
- Despite export challenges, India's economy remains among the fastest-growing globally, supported by domestic demand.
It should be noted that the Asian Development Bank (ADB)'s Asian Development Outlook (ADO), released in April, projected a higher growth rate of 7%, which was reduced to 6.5 percent in the July report due to concerns about a steep 50% US tariff on shipments from India.
While GDP increased by 7.8 percent in the first quarter (Q1) of FY26 due to increased consumption and government spending, additional US tariffs on Indian exports will reduce growth, particularly in the second half of FY26 and FY27, though resilient domestic demand and service exports will mitigate the impact, according to ADO September 2025.
As the tariffs are implemented, the reduction in exports will have an impact on India's GDP in both fiscal years 26 and 27. As a result, net exports will reduce growth more than previously predicted in April, the report said.
However, it stated that the impact on GDP will be limited by a relatively low share of exports in GDP, increased exports to other countries, continued robust services exports unaffected by tariffs, and a boost to domestic demand from fiscal and monetary policy.
ADO also predicts that the fiscal deficit will be higher than the budget estimate of 4.4% of GDP due to lower tax revenue growth, which was exacerbated by GST cuts that were not included in the original budget, while spending levels are expected to remain constant, thereby increasing the deficit.
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Nonetheless, it stated that the deficit will likely be lower than the 4.7% of GDP recorded in FY25. The current account deficit will increase from 0.6% of GDP in FY25 but will remain moderate at 0.9% in the current fiscal year and 1.1% in FY27, it said.
"Import growth will be muted, with lower net petroleum imports owing to lower Brent crude prices. Service exports and remittances will grow rapidly, but overall exports will decline. Net capital inflows are also expected to be lower in both fiscal years due to global economic uncertainties. These trends may reduce international reserves, which will remain strong," it said.
