Key Points
- Growth projection revised down: ADB cuts India’s FY26 forecast to 6.5% from earlier 7% estimate due to US tariffs on exports
- FY25 forecast maintained: India’s growth for current year remains at 6.5% despite strong Q1 performance of 7.8%
- US tariffs impact exports: Additional 50% tariffs on Indian shipments expected to weigh on growth in H2 FY26 and FY27
- Inflation forecast lowered: CPI inflation projected at 3.1% for FY26, down from previous estimates following food price decline
- Fiscal deficit concern: Government deficit expected to exceed budgeted 4.4% of GDP due to lower tax revenues from GST cuts
- RBI rate cuts continue: Policy rates reduced from 6.5% to 5.5% with further monetary easing planned
New Delhi: The Asian Development Bank released its latest Asian Development Outlook on Tuesday, September 30, 2025, maintaining India’s growth forecast at 6.5% for FY25 while revising the FY26 projection downward from 6.7% to 6.5%. The revision reflects growing concerns about the impact of escalating US trade tensions on India’s export performance, despite the economy’s impressive 7.8% growth in the first quarter of FY26.
ADB Country Director for India Mio Oka emphasized that while US tariffs will weigh on growth, “the overall impact on GDP is expected to be contained” due to India’s diversified export markets and strong consumption-driven economy. The bank noted that India’s GDP expanded by 7.6% in the first half of 2025, driven by robust public capital expenditure that offset declining net exports.
Manufacturing and Construction Drive Industrial Growth
India’s industrial sector demonstrated remarkable resilience with manufacturing and construction performing exceptionally well, more than offsetting declines in mining and utilities sectors. Manufacturing conditions have strengthened significantly across India and most ASEAN economies, supported by improving domestic demand and infrastructure investments.
The services sector continues to be India’s star performer, with the Services PMI remaining robust due to rising demand for travel and recreation services. This strength in services is expected to help cushion the impact of reduced goods exports, as global demand for Indian IT and digital services remains strong.
Inflation Outlook Improves Significantly
ADB has substantially lowered its inflation forecast for India to 3.1% in FY26, down from earlier projections, following a faster-than-expected decline in food prices. Consumer Price Index inflation eased to 2.4% year-on-year in the first four months of FY26, prompting the Reserve Bank of India to implement aggressive monetary easing.
The central bank has already cut the repo rate from 6.5% to 5.5% between February and June 2025, bringing rates to their lowest level since August 2022. Additionally, a planned 100-basis-point reduction in the cash reserve ratio across four tranches during September and November is expected to boost banking sector liquidity.
Fiscal Policy Challenges and Government Response
The ADB report projects India’s fiscal deficit will exceed the budgeted target of 4.4% of GDP, primarily due to lower tax revenue following GST cuts that were not incorporated in the original budget. Government spending has outpaced revenue collection in the first four months of FY26, widening the deficit compared to the same period in the previous year.
However, recent policy measures including cuts in GST and personal income tax, combined with employment-linked incentives, are expected to inject fresh energy into both urban and rural markets. These initiatives aim to boost household confidence and support business activity across multiple sectors.
Trade Balance and Current Account Concerns
India’s current account deficit is projected to widen from 0.6% of GDP in FY25 to 0.9% in FY26 and 1.1% in FY27. While import growth will remain muted due to lower net petroleum imports from softer Brent crude prices, overall export performance will be constrained by US tariff measures.
The ADB noted that growth in service exports and remittances will remain robust, but net capital inflows may decline amid global uncertainties. Despite these challenges, the relatively small share of exports in India’s GDP and the country’s ability to redirect shipments to alternative markets will help limit the overall economic impact.
Regional Context and Future Outlook
The revision of India’s growth forecast comes as ADB trimmed its overall growth outlook for developing Asia and the Pacific by 0.1 and 0.2 percentage points for 2025 and 2026 respectively, citing the emergence of a new global trade environment shaped by tariffs and updated trade agreements.
Looking ahead, the ADB expects rice prices to ease amid favorable weather conditions and record harvests in India, the world’s largest rice exporter. Housing construction and government-led infrastructure projects, particularly through the Urban Challenge Fund, are anticipated to gain momentum from FY2026, providing additional support to economic growth.
