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Informist, Tuesday, Sept. 30, 2025

 

NEW DELHI – Asian Development Bank has kept its forecast for India's GDP growth for 2025-26 (Apr-Mar) unchanged at 6.5% but lowered its forecast for FY27 by 20 basis points to 6.5%, citing anticipated headwinds from newly imposed US tariffs on Indian exports. "However, resilient domestic consumption and strong performance in service exports are expected to cushion the impact of these trade barriers," the development bank said Tuesday, as part of its Asian Development Outlook report.  

 

"Despite ongoing trade challenges, we remain optimistic about India's long-term growth trajectory," ADB's Country Director for India Mio Oka said. "The implementation of tariffs will weigh on growth, but the overall impact on GDP is expected to be contained due to India's relatively lower exposure to the US market, increased exports to alternative markets, sustained strength in services exports, and a pickup in domestic demand," he said. 

 

The Indian economy, particularly exports and capital formation, faces risks from the imposition of tariffs by the US. Citing displeasure over the high trade gap, the US has imposed a 25% reciprocal tariff on India, with an additional 25% as punitive tariff for trading with Russia. US' higher tariffs on India result in a pricing disadvantage of 30–35% for Indian exports, making them less competitive compared with those from China, Vietnam, Cambodia, the Philippines, and other Southeast and South Asian countries. The US accounts for nearly 20% of India's total exports. 

 

"...additional US tariffs on Indian exports will reduce growth, particularly in the second half of FY26 and in FY27, though resilient domestic demand and service exports will cushion the impact," the report said.

 

According to the multilateral development bank, recent policy steps, including reductions in goods and services tax rates, cuts in personal income tax, and employment-linked fiscal incentives for both workers and firms, will boost consumption across rural and urban regions and reinforce economic momentum. Prime Minister Narendra Modi's government has given dual tax bonanzas in the form of cut in tax announced in the Budget for FY26 and the recent sweeping goods and services tax reforms, which will lead to savings of over INR 2.5 trillion annually. "As a result, consumption's contribution to growth will be higher than expected earlier," the report said. 

 

 

While the tax cuts will boost consumption, the report noted they may strain federal revenues, leading to the government missing the 4.4% fiscal deficit target in FY26, although the deficit will be lower than 4.7% last year.  

In line with domestic growth drivers balancing exogenous pressures, ADB said investment growth is likely to stay muted in FY26 amid global trade uncertainties, though government spending on urban infrastructure, especially through the urban challenge fund, is set to pick up in FY27. Manufacturing will continue to face pressure from trade barriers dampening industrial growth, though housing construction will continue to remain robust, it said. 

 

Favourable weather will likely boost growth in agriculture this fiscal and the next, ADB also said. Favourable monsoon will also influence domestic inflation, which will be lower in FY26 than expected earlier. "However, the recent surge in monsoon, if it continues, will affect the standing crops," it added.

 

ADB has cut India's inflation outlook for FY26 sharply by 70 bps to 3.1% while it hiked the forecast for FY27 by 20 bps to 4.2%. The inflation outlook will be helped by benign food prices, lower global commodity prices, especially for crude oil, softer household inflation expectations, and the reduction in the average GST rate. The inflation forecast for FY27 is raised as food price increase is expected to return increasingly to the long-term average inflation rate, the report said. 

 

ADB also highlighted several near-term risks, including escalating trade tensions that could impact broader sectors of the economy, global geopolitical uncertainties that may dampen demand for India's exports, and domestic disruptions stemming from ongoing flood-related shocks. However, on the upside, growth could be spurred if US tariffs on India are lowered to be more in line with those imposed on other countries in Asia and the Pacific, it said. 

 

India is currently in discussion with the US for a trade deal with preferential tariff treatment, compared with other trading partners, to mitigate and lower some of US' reciprocal and punitive tariff blow.  End

 

Reported by Priyasmita Dutta and Pratiksha

Edited by Subhojit Sarkar

 

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