India’s Economy Projected to Grow 6.5% in FY26: How US Tariffs Could Impact Exports, Insights from the Asian Development Bank

New Delhi: The Indian economy saw a solid growth of 7.8% in the first quarter of the financial year. However, it’s now projected to slow down to 6.5% for the entire year, primarily due to the impact of US tariffs on Indian exports. The Asian Development Bank (ADB) adjusted its earlier growth forecast from 7% down to 6.5% this July, citing concerns about a steep 50% tariff on shipments from India.

Strong consumer spending and government investments helped achieve the initial growth. But as the year progresses, the effects of these tariffs are expected to dampen growth, especially in the second half of the financial year and the following year. Still, a steady demand within the country and service exports will help soften this impact, according to the latest ADB report.

The tariffs will affect India’s exports, which will then reduce GDP growth projections for both FY26 and FY27. However, the overall impact might be less severe than expected because exports only make up a small portion of the GDP. Increased exports to other nations and a strong service sector that isn’t directly hit by tariffs will cushion the blow. Additionally, government policies aimed at boosting domestic consumption may offer further support.

On another note, the country’s fiscal deficit is expected to exceed the earlier estimate of 4.4% of GDP due to slower tax revenue, partly from GST cuts not included in the original budget. Yet, this deficit is still anticipated to be below the 4.7% recorded in FY25. The current account deficit is also projected to rise from 0.6% in FY25 to a moderate 0.9% this year and 1.1% next year.

With imports projected to grow slowly and international economic uncertainties, capital inflows could drop, potentially affecting foreign reserves. Nevertheless, reserves are likely to remain robust.

As for inflation, the ADB has lowered its forecast to 3.1% for this financial year, primarily due to a rapid decline in food prices. In the early months of FY26, consumer inflation fell to 2.4% as food price increases slowed. This allowed the Reserve Bank of India to lower interest rates, helping to support economic growth.

After keeping the repo rate steady for nearly two years, the Monetary Policy Committee cut it in stages, bringing it down to 5.5%, the lowest since August 2022. In parallel, they also reduced the cash reserve ratio to improve bank liquidity.

Interestingly, the first four months of FY26 saw the government’s spending outpace revenue growth, leading to a widening fiscal deficit compared to the same period last year. Direct tax collections fell by 7.5%, yet overall revenue grew largely due to dividends from the central bank. While capital spending surged, subsidies saw mixed changes, with food subsidies dropping but fertilizer subsidies rising due to increased global prices.

Foreign direct investment (FDI) also appears to be lagging, influenced by ongoing global trade uncertainties. This situation reflects broader trends affecting economies worldwide as they navigate complex trade dynamics.

For more context on the impacts of tariffs and broader economic shifts, check out this detailed report from the [International Monetary Fund](https://www.imf.org). Understanding the financial landscape can help us grasp what these changes mean for our daily lives.

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ASIAN DEVELOPMENT BANK, INDIA GDP, INDIAN ECONOMY GROWTH RATE, US TARIFFS ON INDIAN GOODS, INDIAN ECONOMY TO GROW AT 6.5 PC IN FY26 US TARIFFS TO WEIGH ON EXPORTS ADB