1. Introduction: Growth amid Global Uncertainty
As the global economy adjusts to a period marked by fragmentation, trade tensions, and tightening financial conditions, India stands out as one of the few large economies maintaining robust growth momentum. The IMF’s World Economic Outlook (October 2025) projects India’s GDP growth at 6.6 percent in 2025 and 6.2 percent in 2026, making it the fastest-growing major economy in the world. This performance comes despite an international backdrop characterized by slowing trade volumes, policy uncertainty, and the persistence of geopolitical realignments.
While the global growth rate is expected to moderate to 3.0 percent in 2025, the report underscores that emerging and developing Asia—anchored by India—will continue to drive much of the world’s economic expansion. The upward revision in India’s forecast from the IMF’s July 2025 update reflects strong first-quarter momentum, resilient domestic consumption, and front-loaded trade activity that counterbalance external headwinds such as higher U.S. tariffs and subdued global investment.
2. Short-Term Outlook: Strength in Domestic Demand
India’s near-term growth outlook, as assessed by the IMF, rests on three interlocking pillars:
- Vigorous domestic demand,
- Targeted fiscal expansion, and
- Relative resilience to global trade disruptions.
a. Consumption and Investment
Domestic consumption remains India’s main growth driver, buoyed by rising real incomes, improving rural demand, and ongoing urban infrastructure spending. Fiscal support in 2025—particularly through public investment in transport and green infrastructure—has continued to stimulate activity. The IMF notes that this fiscal expansion more than offset the drag from heightened uncertainty and tariffs, underscoring the centrality of domestic policy buffers.
Private investment has shown tentative recovery, supported by the Production-Linked Incentive (PLI) schemes, government capital expenditure, and easing credit conditions. However, higher borrowing costs globally and weak export orders could moderate this momentum later in 2026.
b. Inflation and Monetary Policy
Inflation has been softer than expected, a development, the IMF attributes to lower food and energy prices, stable administrative costs, and effective monetary management by the Reserve Bank of India (RBI). The report specifically highlights that inflation surprises in India were on the downside, distinguishing it from economies like Mexico or the U.K., where prices overshot forecasts.
The IMF’s baseline assumes monetary policy will remain consistent with achieving the RBI’s 4 percent inflation target over the medium term. This stable inflation environment supports real wage growth and consumption, while providing policy space to manage potential external shocks.
c. Trade Resilience and External Sector
Despite the imposition of higher U.S. tariffs on Indian exports, India’s diversified trade structure and strong domestic market have limited the negative impact. The IMF projects only a cumulative 0.2-percentage-point reduction in GDP growth relative to pre-tariff forecasts. Front-loading of trade—where firms expedited shipments before tariff changes—also provided a temporary boost to 2025 growth.
India’s current account deficit is expected to remain contained, supported by resilient remittance inflows, robust services exports (especially in IT and business services), and moderating oil import bills due to lower global prices. The combination of steady capital inflows and a comfortable level of foreign reserves provides external stability.
3. Structural Drivers of Medium-Term Growth
The IMF situates India’s outlook within a global context where medium-term growth prospects are dimming for most economies. Yet, India’s fundamentals suggest it could remain an outlier. Three key structural drivers underpin this optimism:
a. Demographics and Labor Dynamics
India’s large and youthful population—combined with rising female labor participation and a gradual formalization of employment—creates the potential for a demographic dividend that will sustain consumption and productivity growth over the next decade. In contrast, aging populations in advanced economies and restrictive migration policies in major markets pose long-term constraints elsewhere.
b. Digital Transformation and Services Export Strength
India’s rapid adoption of digital public infrastructure (DPI)—including UPI, Aadhaar, and digital identity frameworks—continues to improve financial inclusion, reduce transaction costs, and expand productivity. The IMF report implicitly credits India’s technology sector and service exports as critical resilience factors amid global trade fragmentation. The country’s IT-enabled services and start-up ecosystem have positioned it as a global hub for digital innovation and outsourcing.
c. Industrial and Green Transitions
The October 2025 WEO dedicates attention to industrial policy as a growth tool, highlighting trade-offs in designing effective interventions. In India’s case, the focus on domestic manufacturing incentives, renewable energy expansion, and supply-chain diversification fits the broader global shift toward strategic industrial policy. The IMF’s analysis suggests that, if well-targeted and transparently implemented, such policies can improve resilience without distorting competition.
India’s energy transition and commitment to net-zero by 2070 also align with global sustainability imperatives and could attract green capital inflows. With falling solar and battery costs, India is emerging as a competitive player in renewable energy manufacturing, which could redefine its export base over time.
4. Challenges and Downside Risks
Despite strong fundamentals, the IMF underscores several risks that could temper India’s growth trajectory:
a. Global Fragmentation and Trade Headwinds
Persistent trade policy uncertainty and geopolitical fragmentation are central risks. The IMF warns that technological decoupling, suboptimal resource allocation, and limitations on knowledge diffusion could restrain medium-term productivity. As an export-dependent emerging economy in select sectors (pharmaceuticals, software, engineering goods), India could face indirect spillovers from these global disruptions.
b. Fiscal Consolidation and Public Debt
While the near-term fiscal stance supports growth, the IMF cautions that credible medium-term consolidation frameworks are essential. Elevated public debt and contingent liabilities, if unaddressed, could constrain fiscal space for future shocks. The report urges all emerging economies—including India—to balance growth-supportive spending with credible debt management.
c. Financial and External Vulnerabilities
A tightening in global financial conditions could raise India’s cost of external financing. The IMF notes that emerging markets remain exposed to higher sovereign yields and rollover risks, particularly if U.S. rates stay elevated. However, India’s relatively deep domestic debt markets and prudent external borrowing limit systemic risk.
d. Climate and Structural Constraints
Climate shocks—such as irregular monsoons and extreme weather—pose recurrent risks to India’s agricultural output and inflation stability. Moreover, uneven progress on labor reforms, land acquisition processes, and female workforce participation could impede productivity gains.
5. Comparative Context: India within Emerging Asia
According to the IMF’s regional breakdown, Emerging and Developing Asia is projected to grow at 5.0 percent in 2025 and 4.5 percent in 2026, compared with 4.0 percent for all emerging markets and 1.6 percent for advanced economies. Within this group, India remains the standout performer. China’s growth, by contrast, is moderating amid real estate stress and subdued consumption, while ASEAN economies face trade-related slowdowns.
India’s ability to maintain growth above 6 percent therefore carries global significance—accounting for a large share of incremental world output. The IMF’s data show that, by purchasing power parity, India is now a critical driver of global income convergence. The resilience of its domestic market allows it to absorb external shocks more effectively than export-reliant peers.
6. Policy Outlook: Balancing Growth with Stability
The IMF’s country-specific assumptions highlight a macroeconomic policy mix that remains balanced and credible.
- Monetary Policy: The RBI is expected to stay vigilant but flexible, aligning with the inflation target while supporting growth through measured liquidity management.
- Fiscal Policy: Fiscal expansion in FY2025, focused on infrastructure and social investment, is justified in the short term. However, the IMF stresses the need for medium-term fiscal anchors to preserve credibility.
- Structural Reforms: The IMF reiterates that productivity gains from structural reforms—particularly in logistics, labor markets, and governance—are essential to sustain high growth.
The Fund also encourages India to leverage multilateral cooperation and maintain an open trade regime, even as global protectionism rises. Regional and digital trade agreements, combined with continued improvement in the business environment, can enhance investor confidence.
7. Medium-Term Vision: Sustaining 6-Plus Percent Growth
India’s growth momentum appears durable, but sustaining it will require attention to four strategic priorities:
- Deepening Infrastructure and Capital Formation: Public investment should crowd in private participation through transparent PPP models and predictable regulatory frameworks.
- Human Capital and Skilling: With over 12 million youth entering the labor force annually, scaling up vocational training and digital literacy will be vital.
- Green Growth Transition: Climate-resilient agriculture, renewable energy, and sustainable urbanization must be integrated into core economic planning.
- Innovation and Governance: Strengthening intellectual property regimes, judicial efficiency, and data governance will be key to enabling high-tech sector expansion.
If implemented effectively, these priorities could lift potential growth to 7 percent or more in the latter half of the decade.
8. Conclusion: India as a Global Growth Anchor
The IMF’s World Economic Outlook (October 2025) presents a cautiously optimistic view: global prospects remain dim for most economies, yet India’s story is one of resilience and renewal. With growth forecast at 6.6 percent in 2025, low and stable inflation, and fiscal flexibility, India continues to serve as a bright spot in an uncertain global environment.
Its ability to combine macroeconomic stability with structural transformation—through digitization, manufacturing incentives, and climate-aligned investment—positions it as a pillar of global economic growth in the decade ahead. Nevertheless, maintaining momentum will depend on prudent policy execution, credible fiscal management, and continued openness to trade and technology flows.
In a world adjusting to fragmentation, India’s growth prospects exemplify the potential of large emerging economies to chart independent yet globally connected paths to development. With sound governance and sustained reform, India could not only remain the fastest-growing major economy but also redefine the trajectory of growth in the Global South.
Falendra Kumar is Professor of Economics at the University of Jammu.
The content of this article reflects the views of the author(s) alone and should not be interpreted as representing the views or policies of the Institute.
